Risk refers to the amount of loss that a person is willing to chance in business situation. The relationship between risk and return is defined through what is known as the risk-return relationship or tradeoff. The Risk-return tradeoff is the level of risk that must be incurred to making a return on an investment. This relationship is understood in terms of lower risk creating lower returns and higher risk creating higher returns (Cornett, Adair, & Nofsinger, 2016). This relationship is best understood from an investment standpoint. Some investments are low risk but typically yield small to moderate returns. This can also be seen in the global market. Operating or entering a global market widens the market for a company but it also presents increased risks such as currency exchange risk, regulations, and many other factors that can create loss for a company. Choosing whether to take a risk in this market is often based on the potential for return. For example, in China there is low exchange risk but high potential for profit when manufacturing goods. This would make entering the market enticing for many companies.
Cornett, M., Adair, T., Nofsinger, J. (2016). M: Finance (3rd ed.). Irwin Mcgraw-Hil
Arbitrage generates what is known as arbitrage profits. Arbitrage profits are the riskless profits made without investing funds. These profits are generated when certain assets are not priced according to an equilibrium relationship. For example, arbitrage profits are possible in the spot and forward exchange markets if the indirect quote or cross quote relationships are out of line. The respective arbitrage processes are called simple and triangular arbitrage. Arbitrage opportunities exist if the money market rates differ from the forward market rates. This is referred to as: Covered Interest Arbitrage.