Query related to forex risk management
This query is : Resolved
KAMAL PAWAR
(Querist)
09 December 2008
WHAT IS TRIANGULAR ARBITRAGE IN FOREIGN EXCHANGE RISK EXPOSURE?
Bindu Madhav
(Expert)
10 December 2008
Triangular arbitrage is an arbitrage -i.e taking advantage of differences in three foreign currency quotes. It is like other arbitrages risk free.
Example:
1US$ = INR 50 (Rs.)
1US$ = Euro 0.78
1Euro = INR 65.10
So a trader who wish to take the Triangular Arbitrage advantage - he will do like this,
a) Buy 2000 USD by paying INR 100000
b) Buy Euro 1560 by paying USD 2000
c) Sell Euro 1560 take INR = results INR 101556
NET GAIN is Rs. 1556 (without any risk)
However, as these transactions (Buy/Sell) will involve costs - in general this arbitrage won't be there or a very temporary phenomena.
Example:
1US$ = INR 50 (Rs.)
1US$ = Euro 0.78
1Euro = INR 65.10
So a trader who wish to take the Triangular Arbitrage advantage - he will do like this,
a) Buy 2000 USD by paying INR 100000
b) Buy Euro 1560 by paying USD 2000
c) Sell Euro 1560 take INR = results INR 101556
NET GAIN is Rs. 1556 (without any risk)
However, as these transactions (Buy/Sell) will involve costs - in general this arbitrage won't be there or a very temporary phenomena.
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