Triangle arbitrage
From Wikipedia, the free encyclopedia
Triangle arbitrage (also known as triangular arbitrage) refers to taking advantage of a state of imbalance between three markets: a combination of matching deals are struck that exploit the imbalance, the profit being the difference between the market prices.
Triangular arbitrage offers a risk-free profit (in theory), so opportunities for triangular arbitrage usually disappear quickly, as many people are looking for them.
[edit] Example
Suppose the exchange rate between:
- the Canadian Dollar (CD$) and the US dollar (US$) is CD$1.13/US$1.00 in Canada (1 USD gets you CD$1.13)
- the Australian Dollar (AU$) and the US dollar (US$) is AU$1.33/US$1.00 in Australia (1 USD gets you AU$1.33)
- the Australian Dollar (AU$) and the Canadian Dollar (CD$) is AU$1.18/CD$1.00 (1 CD gets you AU$1.18)
Assuming that a US investor has US$10,000 to invest, he will:
- 1st) Buy Canadian Dollars with his US Dollars: US$10,000 * (CD$1.13/US$1) = CD$11,300
- 2nd) Buy Australian Dollars with his Canadian Dollars: CD$11,300 * (AU$1.18/CD$1.00) = AU$13,334
- 3rd) Buy US Dollars with his Australian Dollars: AU$13,334 / (AU$1.33/US$1.0000) = US$10,025
- 4th) Profit: US$25.00 Risk Free
