Triangular currency arbitrage made easy (hopefully)

That one is pretty advanced. Might be a job for CFAsniper.
It’s on page 596. Example 4, in case anyone else wants to try.
 
kickin and faraz,
the steps outlined in example 4 on page 596 suggest the starting amount is EUR 1.5 or USD 1.8.
As you rightly pointed out, you could make EUR 0.00333 for every EUR 1, in other words EUR 0.005 starting with EUR 1.5
 
do you guys honestly see them asking you to solve for the amount that is possible to gain in a triangular arbitrage with 3 spot rates being given? that takes a while, so I personally think they want to fry as many fish as possible, and longass questions like this don’t seem practical with that objective in mind.
 
The probability of this question showing up is actually higher than you think. I also use the method CFAsniper has described because i learned it in college. If you practice this a few times, you can get the answer in less than a minute. Maybe even around 30-45 seconds….
But once you consider how there’s probably going to be only 1 vignette on economics, yeah it’s probably not worth practicing if you can’t get it in 30 minutes…
 
One question here…
in the Schweser Quicksheet for Triangular Arbitrage, it simply says “Up the Bid and Down the Ask”
Can someone expand on this…(I tried or at least I think I tried this for the problem in the Schweser book but didn’t get to the right answer…they did Down the Ask, then up (or to the left) Bid, then up the Ask again…)
 
try dealer will screw you as you try to arbitrage.
When you convert from base to foreign , you get less – use Bid – its a multiplication
When you convert back to base from foriegn , you get less again – use Ask – its a division.
You cannot go wrong if you use the simple prinicple that you cannot win against the dealer
 
CFAsniper,
I see a lot of confusion on the Arb Triangle here.
Question - why would you buy at the bid? Shouldn’t we buy at the ask and sell at the bid? Unless we’re the market maker’s perspective, which I doubt - otherwise we wouldn’t be seeking for arbitrage opportunities.
Quote from your post:
“Re: Triangular currency arbitrage made easy (hopefully) Posted by: CFASniper (IP Logged)
Date: May 7, 2010 12:41PM
Dear yellayella
You will be given the base currency in the exam and will be asked to calculate arb profit starting with a given amount of the base currency.
When you are buying you use bid rates. <—-??????????????????
e.g. use CHF to buy USD ==> use bid quote for USD/CHF which gives you the amount of USD you can buy from a dealer for 1 CHF”
 
alrs:
You would buy the counter at the bid price with your base currency.
So if its USD:JPY, and you are starting with 1,000 USD (which is your base currency) and bid is sell base-buy counter, therefore you are selling your base currency (1,000 USD) to buy counter at the bid rate.
 
joseph213 Wrote:
——————————————————-
> alrs:
>
>
> You would buy the counter at the bid price with
> your base currency.
> So if its USD:JPY, and you are starting with 1,000
> USD (which is your base currency) and bid is sell
> base-buy counter, therefore you are selling your
> base currency (1,000 USD) to buy counter at the
> bid rate.
This is incorrect. You buy at the ask and sell at the bid. Try going on the floor of the NYSE making a market selling at the bid and buying at the ask, you will become everyone else’s favorite dealer.
If you use FX rate algebra and stick to the worse off method, you’ll be fine on the exam.
 
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