My Triangular Arbitrage Trick sat, remember, examples, process, struggled

BC_MBA_student

So I have always struggled with this but today I finally sat down and worked through a few examples and came up with this thought process to make sure I am always using the right rate at the right time.

These questions always start with the bid ask spreads from a lender. You have to remember that the rates are their bid and ask. Not yours. This example is #13 on page 323 of the Schweser text.

BID ASK
USD:EUR 0.7 0.701
GBP:USD 1.7 1.701
GBP:EUR 1.2 1.201

These questions will always give you an amount of money to start with. In this example we start with $1,000,000

The way I write it out to make sure I think it straight is as follows;

BUY GBP with USD @ Ask: $1,000,000 * 1/(1.701USD/GBP) = 587,889 GBP
BUY EUR with GBP @ Ask: 587,889 GBP *1/(1/1.2EUR/GBP) = 705,467 EUR
BUY USD with EUR @ Ask: 705,467 EUR * 1/(0.701EUR/USD) = 1,006,372

Profit = 1,006,372 - 1,000,000 = 6,372 USD


To some, that might look like a lot of inverting of the rate but my thought process is always saying I am buying X currency with Y currency at the ask. X:Y @ Ask

In the first line, GBP:USD 1.7-1.701 and the ask is 1.701USD/GBP. It will require the inverse but this ensures I will have the right rate.

I hope this helps clear this topic up for others as much as it helped me.

Chris