Currency Triangular Arbitrage

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iamMichael

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Hi, does anyone know the secret to solving these types of problems? I usually just draw the triangle? Do people do that too? Wondering it there was a quicker way.
 
That’s what I’d do.
Remember when you’re working the bid/ask spreads that dealers are never your friends; they’ll always charge you the higher amount and give you the lower amount. If you’re multiplying by the exchange rate, choose the smaller; if you’re dividing by the exchange rate, choose the larger.
 
And it literally doesnt matter what countries I put in the corners right of the triangle right Magician? As long as I follow the rule. okay I feel a lot better now since I am doing what the Magician does woooooot.
 
I actually get confused how to start the triangle? Is there a rule for which countries go where?
 
Suppose AAA/BBB = X1 / X2
Where X1 is the bid, X2 is the ask.
BBB/CCC = X3 / X4
Then AAA/CCC = (X1*X3) / (X2*X4) and see if this is within the dealer’s bid/ask spread for AAA/CCC.. if the ranges don’t overlap, then you have a triangular arbitrage opportunity.. you buy at the the lowest ask price and sell at the highest bid price.
What if they give you DDD/BBB = X5 / X6 and you need to find AAA/DDD?
First find BBB/DDD = (1/X6) / (1/X5) (note: the bid is always smaller than the ask if you forget to flip them around..)
And AAA/DDD = (X1/X6) / (X2/X5)
Maybe it’s just me but drawing the triangle makes it even more confusing.. the equations are much more intuitive.
 
iamMichael wrote:And it literally doesnt matter what countries I put in the corners right of the triangle right Magician? As long as I follow the rule. okay I feel a lot better now since I am doing what the Magician does woooooot.
Click to expand...
It doesn’t matter which country you put where; topologically, all triangles are equivalent (homeomorphic).
 
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