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Query related to forex risk management

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09 December 2008 WHAT IS TRIANGULAR ARBITRAGE IN FOREIGN EXCHANGE RISK EXPOSURE?
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Bindu Madhav

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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.

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