Triangular arbitrage


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Triangular arbitrage

Striking offsetting deals among three markets simultaneously to obtain an arbitrage profit.

Triangular Arbitrage

A series of three currency trades in which the exchange rates do not exactly match up. In triangular arbitrage, an arbitrageur may profit from the inefficiency in pricing of the exchange rates. The process of triangular arbitrage involves converting one currency to another, then to a third, then back to the first. Opportunities for this are rare because the currency markets are so liquid as to provide almost perfect efficiency. It ordinarily requires advanced computer software to accomplish it successfully.
References in periodicals archive ?
In foreign exchange markets, absence of triangular arbitrage implies a deterministic relationship between any pair of dollar rates and the corresponding cross rate.
This point can be easily seen in a three-point arbitrage or triangular arbitrage. Three-point arbitrage involves switching funds among three currencies in order to profit from exchange rate inconsistencies.
Triangular arbitrage exploits the relative price difference between one currency and two other currencies.
This article also adds to a sparse pedagogical literature on arbitrage, which includes Knoll (2005), who explains how applications of the no-arbitrage put-call parity relationship can be used to exploit differential tax treatments of economically equivalent financial positions; Wei (1997), who details triangular arbitrage; and articles on in-class simulations by Dubil (2004), Marshall (2004), and Alonzi, Lange, and Simkins (2000).
"Conditions for no triangular arbitrage with transaction costs: a pedagogical note." Journal of Education for Business 73 (Sept/Oct): 44-47.
However, in 1901 gold shipments to London ceased and were replaced by triangular arbitrage shipments through Paris.