What is a triangular arbitration?

Also known as triangular arbitration, triangular arbitration refers to the process by which the trader uses mismatch between exchange rates of three different currencies. By shopping and selling these specific currencies, the trader makes a risk -free profit. Such a mismatch usually takes only a few seconds, because there are a large number of traders who are actively looking for such an opportunity, so only sophisticated advanced equipment traders are usually able to use it. A trader who notices this imbalance uses currency A to buy currency B, which then turns into currency C. Finally, it converts money back to currency and ends with profit. USD/UK Pound (GBP) = 1.60; JPY/GBP = 140. Calculation of the first two quotes should be a exchange rate of JPY/GBP 100 x 1.60 = 160, so the quotation underestimates GBP against JPY. In this case, there is a discrepancy of the exchange rate and an opportunity for triangular arbitration.

merchant pIt uses its $ 1,000 USD to buy a Japanese yen and get ¥ 100,000 JPY. He or she converts it again to the Great Britain pounds, get 714.29 GBP - because GBP/JPY = 1/140 = 0.0071429. Finally, the trader sells GBP for USD and receives $ 1,142.86. Therefore, the trader receives a risk-free profit of $ 142.86 a final trade part of the minus the original investment of $ 1,000 = $ 142.86 from a triangular arbitration.

Because many traders are looking for such an opportunity, a triangular arbitration opportunity usually takes only a few seconds. The trader must make these transactions on the same tija or in a very short time. If the trader takes too long to complete these transactions, the exchange rates could change before completing the triangular arbitration process. In this case, the trader would face the risk and change the process into a pseudo-arbitrate. Traders performing triangular arbitration need sophisticated computer equipment and software to quickly complete transactions.

The triangular arbitration changes traders in a civilian course. They change the prices of different currencies and bring exchange courses to balance. In this way, triangular arbitration helps to restore the balance on the foreign exchange market.