Time to sign your Free Agents. Is he worth the money he is asking? How long of a contract as opposed to his age? Do you have a player that is better in the minors? Compensation picks maybe? Does he fit in with the teams future plans? These are just a few questions to ask yourself.
How anyone handles this is their prerogative. The only rules that I follow are rather simple. I normally won't sign a player whose age exceeds 34 by the end of their contract. I won't sign a defensive bench warmer for more than $3M. Minor league players asking for a big contract aren't worth it. Never release a FA, he will leave on his own...lol.
Arbitration isn't all that hard except for a newbie. Once a player has accrued 3 year of ML service, he is Arbitration eligible. Normally an Arb player in their 1st year can be signed rather cheaply but must go thru arbitration and is normally won by the team even though it says otherwise. Second time Arb players is a different story and can get more money than they are asking. Third year players is even more difficult as they can opt for Free Agency which is more likely to happen.
I normally go thru arbitration on players I want to keep the first year giving them their asking price. The second year I give them their asking price for a long term contract. I normally won't trade an Arb eligible player because the window is so small to get the trade done, though I have done it. Most generally the owner will do the arbitration at your request while the trade is in progress. If you don't want an Arb eligible player and can't get him traded then release him before the end of the hearings cycle.