Triangular arbitrage (also referred to as cross currency arbitrage or three-point arbitrage) is the act of exploiting an arbitrage opportunity resulting from a pricing discrepancy among three different currencies in the foreign exchange market.[1][2][3] A triangular arbitrage strategy involves three trades, exchanging the initial currency for a second, the second currency for a third, and the third currency for the initial. During the second trade, the arbitrageur locks in a zero-risk profit from the discrepancy that exists when the market cross exchange rate is not aligned with the implicit cross exchange rate.[4][5] A profitable trade is only possible if there exist market imperfections. Profitable triangular arbitrage is very rarely possible because when such opportunities arise, traders execute trades that take advantage of the imperfections and prices adjust up or down until the opportunity disappears.[6]
^Carbaugh, Robert J. (2005). International Economics, 10th Edition. Mason, OH: Thomson South-Western. ISBN 978-0-324-52724-7.
^Pilbeam, Keith (2006). International Finance, 3rd Edition. New York, NY: Palgrave Macmillan. ISBN 978-1-4039-4837-3.
^Aiba, Yukihiro; Hatano, Naomichi; Takayasu, Hideki; Marumo, Kouhei; Shimizu, Tokiko (2002). "Triangular arbitrage as an interaction among foreign exchange rates". Physica A: Statistical Mechanics and Its Applications. 310 (4): 467–479. arXiv:cond-mat/0202391. Bibcode:2002PhyA..310..467A. doi:10.1016/S0378-4371(02)00799-9.
^Madura, Jeff (2007). International Financial Management: Abridged 8th Edition. Mason, OH: Thomson South-Western. ISBN 978-0-324-36563-4.
^Eun, Cheol S.; Resnick, Bruce G. (2011). International Financial Management, 6th Edition. New York, NY: McGraw-Hill/Irwin. ISBN 978-0-07-803465-7.
^Ozyasar, Hunkar (2013). "Strategy for FOREX Triangulation". The Nest. Retrieved 2014-06-15.
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