Explain How Transaction Costs Can Eliminate an Apparent Arbitrage Opportunity

Transaction costs act as a barrier to entry for arbitrage. An apparent arbitrage exists when the gross profit (the basis spread) is positive.

However, if the sum of all costs ▴ such as trading fees, exchange commissions, and the cost of borrowing capital ▴ exceeds the gross profit, the net profit becomes zero or negative. In this case, the apparent mispricing is not large enough to overcome the costs, and the arbitrage opportunity is eliminated for all but the lowest-cost traders.