What Is a Triangular Arbitrage?

Triangular arbitrage is arbitrage that uses cross-exchange rate pricing errors. Arbitrage makes the actual cross exchange rate consistent with the theoretical cross exchange rate. In the international market, almost all currencies have an exchange rate against the US dollar. The theoretical exchange rate between two non-US countries can be inferred from the exchange rate between them and the US dollar. This kind of calculated exchange rate is called the theoretical crossover exchange rate. In the real world, it rarely happens that the theoretical cross exchange rate calculated based on the dealer's quote on the US dollar exchange rate is different from the actual cross exchange rate reported by the dealer. If the difference is large enough to compare with the transaction costs of buying and selling currencies, a risk-free arbitrage opportunity arises. ^[1]

Triangle arbitrage

Income

Triangular arbitrage process: The exchange rate calculated through the cross exchange rate is different from the actual exchange rate on the market, resulting in arbitrage space in the market. Market participants can trade foreign currencies between different banks at the same time for so-called triangular arbitrage.