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:
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:
To learn more, click here.