Triangular 3Point Exchange Arbitrage

1
Triangular (3-Point) Exchange Arbitrage

• Exchange arbitrage is the activity that unifies
  the foreign exchange market spatially. That is,
  it assures that the same exchange rates tend to
  rule at any moment in time, whether they are
  quoted by a London bank, a New York bank , or a
  Singapore bank.

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Example
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Equilibrium Conditions

• /DM /FF FF/DM
• /FF /DM DM/FF
• FF/DM FF/ /DM
• FF/ FF/DM DM/
• DM/ DM/FF FF/
• DM/FF DM/ /FF

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Example
5
Tests for Cross Rate Alignment

• / SF / / SF
• 0.20 lt 1.80 0.125
• / / SF SF /
• 1.80 gt 0.20 8.00
• SF / SF / /
• 8.00 lt 5.00 1.80

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Solution

• -------- -------- SF --------
• 1M / 1.80 555,555.56
• 555,555.56 8.00 SF 4,444,444.44
• SF 4,444,444.44 0.20 888,888.88
• Loss 111,111.11

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Solution

• -------- SF -------- --------
• 1M / 0.20 SF 5,000,000
• SF 5,000,000 / 8.00 625,000
• 625,000 1.80 1,125,000
• Profit 125,000