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 Quotes

Calculating Triangular Arbitrage Lot Size

Have you ever wondered how to correctly size positions between the underlying pair and its synthetics to eliminate or hedge directional risk? This article describes  how to calculate triangular arbitrage lot size to fully hedge all exposure when initiating a triangular arbitrage trade. The arbitrage trade is at the heart of all good strategies that take advantage of inefficiency. In the forex market this means triangular arbitrage, so understanding how to correctly size positions to eliminate or minimize individual currency risk is very important.

Triangular Arbitrage Lot Size

What triangular arbitrage lot size should be traded to capture this 6 pip inefficiency?