Saturday, May 18, 2013

Triangular Arbitrage with Bid Ask Prices

Is is possible to identify triangular arbitrage opportunities using bid and ask prices for a theoretical risk free trade? Using simple rules and examples it is possible to determine the proper formula for computing triangular arbitrage relationships. The three examples show how to calculate the triangular arbitrage formula for different currency pairs due to the way pairs are converted to base currency and traded via currency pairs. The results can be intuitively interpreted to determine if a real arbitrage opportunity exists, or if an opportunity exists to improve execution price by using the synthetic pair instead of the underlying pair for trade execution even when no real arbitrage opportunity exists.

Triangular Arbitrage with bid ask prices 1000 bid vs synthetic ask quotes.png (654×446)

Triangular Arbitrage with Bid Ask Quotes