Triangular arbitrage is a means of earning risk - free profit by converting an amount in the first currency to the second, then converting the amount in the second currency to the third and in the end, converting the amount in the third currency back to the starting currency.
Let us say we have $100 and we convert them to Euros at the going exchange rate, then convert our Euros to, let us say Yens and then convert our Yens back to dollars. If we find that the ending amount of dollars is more than what we started from ($100), then we have made a profit which is risk - free and is called the triangular arbitrage profit.
Let us say we have $100 and we convert them to Euros at the going exchange rate, then convert our Euros to, let us say Yens and then convert our Yens back to dollars. If we find that the ending amount of dollars is more than what we started from ($100), then we have made a profit which is risk - free and is called the triangular arbitrage profit.
Opportunities for triangular arbitrage arise when there is a temporary disequilibrium between exchange rates. This misalignment is pretty short - lived and usually it can not be spotted unless a trader is alert or, even better, has some automated process set on a computer, which recognizes an arbitrage opportunity and executes a sequence of trades instantly.
The video below demonstrates manually, what a computer is supposed to accomplish:
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