Triangular Arbritage

CFA Level II Economics
#1

On Schweser Econ Concept checkers question 4, how do you know to buy GBP first and then EUR. I went EUR GBP then USD. How do you know which direction to go?

#2

I try one direction at random.

If I lose money, I try the other direction. (Note: this is not necessary if you have a single exchange rate for each pair; I try it only when I have bid/ask rates for each pair.)

There are ways to know, but it’s too much trouble for me to bother remembering them. This way is quick enough for me.

#3

Thanks S2000 magician. It just takes time to do it one way and then another. I did get the right answer but spending that much time in it, would’ve killed me during the exam

#4

The problem is the following

EUR/USD 0.7000 - 0.7010

USD/GBP 1.7000 - 1.7010

EUR/GBP 1.2000 - 1.2010

If you have an initial position of 1 mill USD, what is the potential profit arbritage from triangular arbritage?

#5

Anyone with a faster way to get to the right order of currencies the first time?

#6

ummm no actually you will have to do it both ways…

u can save time by just using the calculator and not writting everything but it would require some practice

#7

or maybe perhaps u can find the cross eur/usd rate using the second and third rate and decide which to long and which to short

#8

My pleasure.

Maybe you’re going about it inefficiently. Let’s use your data:

So, you’ll go either

USD ==> GBP ==> EUR ==> USD

or

USD ==> EUR ==> GBP ==> USD

For the first, you’ll multiply:

USD1,000,000 × (GBP1.0000/USD1.7010) × (EUR1.2000/GBP1.0000) × (USD1.0000/EUR0.7010)

=USD1,006,373.

If you were fortunate enough to start that way, you’re done: the answer’s USD6,373.

For the second, you’ll multiply:

USD1,000,000 × (EUR0.7000/USD1.0000) × (GBP1.0000/EUR1.2010) × (USD1.7000/GBP1.0000)

=USD990,841.

If you were unfortunate enough to start that way, you’d have to go the other way to find the answer.

Sorry, there’s no short-cut.

#9

Magician is a legend

#10

You exaggerate.

Thank you.

#11

Pls find time to update your website

#12

Thanks so much S2000 magician! This makes so much sense and much faster from what i was doing. You ROCK!!

#13

AGREED!!!

#14

This is 10X better than the crap Schweser put on their books.

#15

Done.

Triangular arbitrage is here: http://financialexamhelp123.com/triangular-arbitrage/.

#16

Glad I could be of help.