example of triangualr arbitrage method

CFA Level II
#1

know most are squeezed for time, but if someone could post a quick example how to use the triangle method to solve fx arb questions it would be appreciated, thank you.

#2

Dont have my books, but if you post an example i can show you how its done…

#3

thanks spanishshesk.

#4

http://www.analystforum.com/phorums/read.php?12,1258317,1258317#msg-1258317 Try this. I have this way of thinking about it and I have never got it wrong since.

#5

Lets say: USD:GBP = 2:1 USD:MXN = 10:1 Dealer quotes you: MXN:GBP = 19:1 You convert the first two to come up with arb free price for GBD:MXN Which will be: 2/1 * 10/1 = 20:1 (MXN:GBP) Since the dealer is offering you less MXN pesos for 1 GBP there is an arb opportunity. Ex: If you have 1000 GBP you will go and convert it for $2000 USD which you will then use to buy 20,000 MXN You can then go to the dealer and convert it back to GBP at 19:1 ratio 20,000/19 = 1,052 GBP. A riskless profit of 52GBP This gets tricky and slightly more complicated when they incorporate bid-ask prices for each exchange rate… which you can bet your mom on will be the case on the exam

#6

CFA_Chap Wrote: ------------------------------------------------------- > http://www.analystforum.com/phorums/read.php?12,12 > 58317,1258317#msg-1258317 > > > Try this. I have this way of thinking about it and > I have never got it wrong since. Excellent example… you can ignore my post and just look at this one. Clear and to the point

#7

ZeroBonus Wrote: ------------------------------------------------------- > Lets say: > > USD:GBP = 2:1 > USD:MXN = 10:1 > > Dealer quotes you: MXN:GBP = 19:1 > > You convert the first two to come up with arb free > price for GBD:MXN > > Which will be: > > 2/1 * 10/1 = 20:1 (MXN:GBP) > > Since the dealer is offering you less MXN pesos > for 1 GBP there is an arb opportunity. > > Ex: If you have 1000 GBP you will go and convert > it for $2000 USD which you will then use to buy > 20,000 MXN > > You can then go to the dealer and convert it back > to GBP at 19:1 ratio > > 20,000/19 = 1,052 GBP. A riskless profit of 52GBP > > This gets tricky and slightly more complicated > when they incorporate bid-ask prices for each > exchange rate… which you can bet your mom on > will be the case on the exam shouldn’t it be MXN:USD 10:1? Or else MXN:GBP is 1:5 no? or am i all confused in these quotes

#8

paulx441 Wrote: ------------------------------------------------------- > ZeroBonus Wrote: > -------------------------------------------------- > ----- > > Lets say: > > > > USD:GBP = 2:1 > > USD:MXN = 10:1 > > > > Dealer quotes you: MXN:GBP = 19:1 > > > > You convert the first two to come up with arb > free > > price for GBD:MXN > > > > Which will be: > > > > 2/1 * 10/1 = 20:1 (MXN:GBP) > > > > Since the dealer is offering you less MXN pesos > > for 1 GBP there is an arb opportunity. > > > > Ex: If you have 1000 GBP you will go and > convert > > it for $2000 USD which you will then use to buy > > 20,000 MXN > > > > You can then go to the dealer and convert it > back > > to GBP at 19:1 ratio > > > > 20,000/19 = 1,052 GBP. A riskless profit of > 52GBP > > > > This gets tricky and slightly more complicated > > when they incorporate bid-ask prices for each > > exchange rate… which you can bet your mom on > > will be the case on the exam > > > shouldn’t it be MXN:USD 10:1? Or else MXN:GBP is > 1:5 no? or am i all confused in these quotes apologies it should be: USD:GBP = 0.5 USD:MXN = 10

#9

Bump.