# Triangular Arbitrage

Does anyone have any methods or techniques for remembering how to solve these problems? These seem really confusing. The bid-ask quotes for the US Dollar, GBP, and SF are * SF per USD: 1.6500-10 *USD per GBP: 1.2000-10 *SF per GBP: 2.0000-10 What are the potential arbitrage profits from an initial position of 1 million dollars?

schweser has an amazing strategy create a triangle from the 3 currencies, each has a corner, then go around the circle converting from one currency to the next, if you end up with more money then you started out with you have just made profit using triangular arbitrage, if not, then go around the other way, get it?

viktorv Wrote: ------------------------------------------------------- > schweser has an amazing strategy > > create a triangle from the 3 currencies, each has > a corner, > > then go around the circle converting from one > currency to the next, if you end up with more > money then you started out with you have just made > profit using triangular arbitrage, if not, then go > around the other way, get it? I saw that. But there is as problem. They say “bid up” and “ask down”. But doesn’t this depend on how the quotes are given?? So if they gave us inconsistent quotes this strategy would not work… Am I mistaken?

I have a strategy that takes two minutes to do the whole thing. Its too bad I didn’t have the opportunity to test it on the exam last June.

Correct me if I am wrong, but I think the strategy would be 1. Start off with USD\$1million 2. Convert the USD to GBP. (USD1m/1.2010=GBP832639.4671) 3. Convert the GBP to SF(GBP832639.4671*2=SF1665278.94) 4. Convert the SF to USD(SF1665278.94/1.6510=USD 1008648.66, > USD1m)

Looks easy, but how do you know when to use the bid and when to use the ask? I get hopelessly confused if I try to do it in my head.

Make the triangle. Write the bid and ask on arrows going from curr to curr. If the rate is USD to EU, and you have a bid ask, then the bid goes with the arrow that goes from usd to eu, and ask on the arrow from EU to USD. Then take a currency amount UP the Bid all around the triangle and see if you end up flat. If not, go aroundt he ASKS. It’s easy to remember, because UP the ASK would be painful (insert Peter Griffin Family Guy Laugh). If there’s a problem in LII that isn’t worth worrying about, this is it. THey haven’t asked it in at least 3 years, it’s too easy.

I find that triangle a bit difficult. Could you explain where to put those exchanges rates and what goes up/down in that mnemonic “bid up ask down”? ================================= I tried to make up some sort of mnemonic: I want to take SEK Amt * GBP/SEK * IDR/GBP * SEK/IDR Given: SEK/GBP: 12.5476-12.9485 IDR/SEK: 1496.98-1340.86 IDR/GBP: 18930.67-16982.30 Rewritten on the form I need …| bid …| ask … GBP/SEK | 1/12.9485 | 1/12.5476 IDR/GBP | 18,930.67 | 16,982.30 SEK/IDR | 1/1340.86 | 1/1496.98 GBP/SEK (bid) X IDR/GBP (bid) X SEK/IDR (bid) = 1/12.9485 * 18930.67 * 1/1340.86 = 1.0903428