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John Shandy` (talk | contribs) →Evidence for triangular arbitrage: Adding info, adding citation, cleaning up gross mischaracterizations of the Fenn et al. 2009 paper's findings. |
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==Mechanics of triangular arbitrage==
[[Image:Triangular-arbitrage.svg|thumb|right|A visual representation of a realistic triangular arbitrage scenario, using sample bid and ask prices quoted by international banks.]]
Some international banks serve as [[market maker]]s between currencies by narrowing their [[bid-offer spread|bid-ask spread]] more than the bid-ask spread of the implicit cross exchange rate. However, the bid and ask prices of the implicit cross exchange rate naturally discipline market makers. When banks' quoted exchange rates are move out of alignment with cross exchange rates, any banks or traders who detect the discrepancy have an opportunity to earn arbitrage profits via a triangular arbitrage strategy.<ref name="Eun & Resnick 2011" /> To execute a triangular arbitrage trading strategy, a bank would calculate cross exchange rates and compare them with exchange rates quoted by other banks to identify a pricing discrepancy.
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