The Triangular Arbitrage Opportunity CFA, FRM, and Actuarial Exams Study Notes

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• Automated trading platforms allow a trader to set rules for entering and exiting a trade, and the computer will automatically conduct the trade according to the rules.
• So, converting dollars to euros using the EUR/USD spot price requires multiplying, because you read the pair from right to left.
• These tools have made it easier for individual traders to engage in strategies that were once the preserve of large financial institutions.
• Such cross-correlations at least between two exchange rate time series would offer a potential opportunity of triangular arbitrage.
• This huge volume makes the Forex market the biggest in the world of finance and serves just as a single parameter illustrating its enormous complexity [3].
• ArXiv is committed to these values and only works with partners that adhere to them.

A mantra exists to help people remember—”left to right, divide; right to left, multiply,” referring to the direction in which you read the exchange rate. Market volatility presents both opportunities and challenges, and traders must act swiftly to capitalize on fleeting market inefficiencies. They could incur a loss if the market moves against the trader before they can complete the arbitrage. However, it is essential to note that the opportunities for triangular arbitrage are often fleeting, as market forces typically correct these imbalances quickly. Exchange rates are the relative values of different currencies and play a crucial role in international trade and finance.

How to leverage a triangular arbitrage opportunity

https://www.bigshotrading.info/swing-trading/ involves less risk than trading cryptocurrencies or investing in them. Triangular arbitrageurs aim to profit from price differences between three pairs. Although the buy and sell trajectory for triangular arbitrage is more complex than that of simple arbitrage, it can be worth the effort. Triangular arbitrage opportunities can exist when simple arbitrage opportunities do not exist. Despite the benefits of this money-making technique, traders should consider the possible risks before embarking on triangular arbitrage.

We then find the conversion rates, buy the cheaper currency, convert it into the expensive currency, and then finally sell the expensive currency. As the market continues to move rapidly and automatically, trades occur so rapidly that arbitrage opportunities disappear seconds after appearing. So, programmers will try to fine-tune algorithms to identify opportunities and act on them before they disappear. We have used MATLAB by MathWorks numerical computing environment for implementing our time series methodology with the numerical analysis performed on a modern PC class computer. Validation methods included a simple model parameter variation as well as surrogate data methods.

Fees & Trading Volume:

Note that the calculation above did not consider some factors that could limit profitability. Two significant factors that could limit profitability are price fluctuations and swap fees on the platform. Other factors must be considered before embarking on triangular arbitrage. Triangular arbitrage opportunities have been existing for hundreds of years.

With 63 combinations and 2 approaches, a total of 126 arbitrage combinations were checked and 26 of them showed a profit as below. There are 63 different arbitrage combinations that the code was able to identify. Next extract all the possible combinations to apply the BUY-BUY-SELL and the BUY-SELL-SELL approaches of triangular arbitrage.

The Triangular Arbitrage Opportunity

However, as more traders adopt triangular arbitrage as a strategy, competition for these opportunities is expected to increase, potentially making it harder to earn from it. Additional factors – such as changes in currency markets and regulation – could also impact the profitability of triangular arbitrage. Since triangular arbitrage involves multiple trades and is time-sensitive, the price differences might have changed by the time a trader tries to manually execute the last of the three trades in a triangular arbitrage.