How To Calculate Arbitrage Profit?

How To Calculate Arbitrage Profit?
by Jerome Foster - January 15, 2022

A disparity between three foreign currencies happens when their exchange rates do not exactly line up, resulting in triangular arbitrage. These chances are uncommon, and traders who take advantage of them generally use sophisticated computer equipment and/or software to automate the process.

For example, a trader using triangle arbitrage would exchange an amount at one rate (EUR/USD), convert it again (EUR/GBP), and then convert it back to the original (USD/GBP), netting a profit assuming minimal transaction costs.

When a currency's exchange rate differs from the cross-exchange rate, a triangular arbitrage opportunity exists. Price disparities are most commonly caused by situations in which one market is overvalued while another is undervalued.

Consider the following scenario: you have $1 million and the following currency rates: EUR/USD = 1.1586, EUR/GBP = 1.4600, and USD/GBP = 1.6939.

There is an arbitrage opportunity with these exchange rates:

  • To purchase euros, sell dollars and buy euros: €863,110 = $1 million x 1.1586
  • To exchange euros into pounds, multiply €863,100 by 1.4600 to get £591,171.
  • Convert pounds to dollars: £1,001,384 = £591,171 x 1.6939
  • Subtract your original investment from your total: $1,001,384 divided by $1,000,000 equals $1,384.
  • You would make a $1,384 arbitrage profit from these deals (assuming no transaction costs or taxes).

You can also use different tools to calculate the arbitrage such as Smarkets arbitrage calculator, here’s how you do it. It's easy to use the Smarkets arbitrage calculator. Simply follow the steps below:

  • Enter the total amount of money you're willing to risk.
  • If you're betting on a betting exchange, enter the odds for result 1 and the commission (if you are between bookmakers set the commission value to 0).
  • Rep for any additional outcomes you'd like to arbitrate (add new outcomes if you require more than 4 outcomes on a market).
  • The arb calculator will then automatically calculate your profit and how much you need to bet on each outcome.

To learn more, click here.

homes for sale in Georgia
Finding a Home for Sale in Georgia: A Step-by-Step Guide for First-Time Buyers
So, you’re considering buying a home for sale in Georgia. Well, that’s a great decision to make! With its warm climate, low cost of living, and thriving job market, the Peach State offers great lifestyle perks to potential homeowners. However, ...
Mississippi Farmland A Deep Dive into America's Fertile Investment
Mississippi Farmland: A Deep Dive into America's Fertile Investment
Nestled in the heart of America's southern region, Mississippi stands as a testament to the timeless allure of fertile farmland and the potential it holds for keen investors. As a gateway to the Gulf, its strategic location combines with its ...
6 Budget-Friendly Home Remodeling Ideas for a Fresh Look
6 Budget-Friendly Home Remodeling Ideas for a Fresh Look
Are you looking to give your home a fresh look? Well, refreshing your home's aesthetic doesn't necessarily mean you have to break the bank! In fact, you need a little creativity, research, some elbow grease and you can rejuvenate your ...
Importance of Plant and Machinery Valuation
Importance of Plant and Machinery Valuation
In business, assets play a pivotal role in determining an organization's financial health and growth prospects. Among these assets, plants and machinery hold a unique and indispensable position. They are the workhorses of industries, enabling production, innovation, and efficiency. However, ...
Unlocking Space and Convenience The All-Inclusive Approach of California's Premier ADU Builder
Unlocking Space and Convenience: The All-Inclusive Approach of California's Premier ADU Builder
The pursuit of functional and flexible living spaces has led to the resurgence of Accessory Dwelling Units (ADUs) in California. These secondary living units on residential properties have gained popularity for their potential to provide additional living space, enhance property ...
1 2 3 82
Prudential Cal strives to provide the most detailed information about the real estate industry. We assist people in making the best decisions possible by offering unique insights into the global real estate market and advice for both homebuyers and sellers.
Additional Information
Copyright © 2023 Prudential Cal. All Rights Reserved. Protection Status
linkedin facebook pinterest youtube rss twitter instagram facebook-blank rss-blank linkedin-blank pinterest youtube twitter instagram