Triangle arbitrage

Encyclopedia : T : TR : TRI : Triangle arbitrage

---

Triangle arbitrage is the practice of taking advantage of a state of imbalance between three markets: a combination of matching deals are struck that exploit the imbalance, the profit being the difference between the market prices.

An example on triangle arbitrage

Suppose that:

• the exchange rate between the French Franc (FF) and the US dollar ($) in France is FF10.00/US$1
• the exchange rate between the Deutsche Mark (DM) and the US dollar ($) is 2.00 DM/US$1 in Frankfurt
• the exchange rate between French Franc (FF) and the Deutsche Mark (DM) is 4.00 FF per DM.

In this case, the cross rate will be as follows: (10.00 FF/$1) / (2.00 DM/$1) = 5 FF per DM. That is to say, the exchange rate between the French Franc and the Deutsche Mark will be FF5.0 per DM.

Assuming that an investor has $5000 to invest, he will first buy $5000 (10 FF/$1) = 50000 FF. Then, he will use the 50000 FF to buy 50000FF / (4 FF/DM) = 12500 DM. Finally, he will buy 12500 DM / (2 DM/$1) = $6250 resulting in a $1250 risk-free profit.

See also

• Covered interest arbitrage

 

---

From Wikipedia, the Free Encyclopedia. Original article here. Support Wikipedia by contributing or donating.
All text is available under the terms of the GNU Free Documentation License See Wikipedia Copyrights for details.

Search Titles

0

1

2

3

4

5

6

7

8

9

A

B

C

D

E

F

G

H

I

J

K

L

M

N

O

P

Q

R

S

T

U

V

W

X

Y

Z

?