Triangular arbitrage
A riskless profit when a dealer's quoted cross rate differs from the one implied by two other currency pairs: buy the currency where it is cheap, sell it where it is dear, and route through the third.
Where you will meet it
Triangular arbitrage appears in 2 learning outcomes on the CFA syllabus. A few of them:
- Work out cross-rates between currencies and explain what they mean
“When a dealer's quoted cross-rate differs from the implied one, triangular arbitrage is possible: buy the currency where it is cheap, sell it where it is dear and route through the third currency.”
- Given bid–offer quotes for three currencies, spot a triangular arbitrage and work out the profit it yields
“Triangular arbitrage exploits a dealer's cross rate that is out of line with the cross implied by two other pairs.”
See also
Practise it
Practise triangular arbitrage until it is automatic: questions that explain every wrong option.
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