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Triangular arbitrage

is the process of trading out of the U.S. dollar into a second currency, then trading it for a third currency, which is in turn traded for U.S. dollars. The purpose is to earn an arbitrage profit via trading from the second to the third currency when the direct exchange between the two is not in alignment with the cross exchange rate.

Most, but not all, currency transactions go through the dollar. Certain banks specialize in making a direct market between non-dollar currencies, pricing at a narrower bid-ask spread than the cross-rate spread. Nevertheless, the implied cross-rate bid-ask quotations impose a discipline on the non-dollar market makers. If their direct quotes are not consistent with the cross exchange rates, a triangular arbitrage profit is possible.

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11y ago
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Joerich Ihechi

Lvl 4
1y ago

triangular arbitrage opportunity arises when the exchange rate of three different currencies does not match up in a way that allows for risk-free profit. This is due to discrepancies in the exchange rates of select currency pairs, creating discrepancies between the exchange rates of the three currencies. My recommendation for you: 𝓱𝓽𝓽𝓹𝓼://𝓪𝓻𝓫𝓲𝓽𝓻𝓪𝓭𝓮𝓼.𝓬𝓸𝓶/𝓼𝓲𝓰𝓷𝓾𝓹/𝓘𝓞𝓤𝓑𝓟35𝓩𝓘80.𝓱𝓽𝓶𝓵

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Q: What is a condition that will give rise to a triangular arbitrage opportunity?
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