Can someone help me get the quickest way to profit from an arbitrage opportunity. I can always identify the overvalued/undervalued currency but usually takes me quite some time to figure out the steps in making the arbitrage profit. Any shortcuts of remembering would help.
Buy undervalued, sell overvalued.
I believe someone here suggested taking the cross rate in order to figure out the proper sequence. Personally, I rather take the extra 2 minutes required to go through the triangle in both directions.
I spent a long time on this in the CFAI mock morning , even tho I knew the material , but not the mechanics of how to make it work. Infrustration I adopted a simple forced approach: Dealer quotes CAD/BRL Bid 0.5250 We’re give Bid and Ask on CAD and BRL in USD$ Also given nominal amount in USD$ I converted 1000$ into BRL using the Ask : (nominal USD$)/ ( Ask USD per BRL ) = Nominal in BRL Now take this nominal BRL and convert into CAD$ by using Dealer Quote ( Bid): CAD$ of nominal = ( Nominal in BRL * 0.5250 ) Now convert nominal CAD$ back to USD$ by using the Ask: USD$ = ( Nominal in CAD$ )/ ( Ask CAD$/USD$) Now return the USD$ 1,000,000 to wherever you got it. Were left with the profit answer. It took way too long as I was working at the speed of thought
Just remember to up the bid and down the ask! Ex/ -If you want to convert to Euros and you have and the FX rate is quoted as /Euros -> UP THE BID -If you want to convert and you have Euros and the FX rate is quoted as /Euros -> down the ask. Essentially you have to down the ask when you have to flip the FX rate.
What bpdulog said. If you attempt to arbitrage, one direction will make money and one direction will lose money. So I just go one direction, and keep in mind that with bids/asks you always take the rate that will give you less money in the next currency. If the direction I picked was positive, I know thats the right answer. If it is negative, I go the other direction.