From the course: Understanding Capital Markets
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FX arbitrage
- [Male Instructor] One common approach to FX trading, involves a process called triangular arbitrage. Let's see how this arbitrage works, and how we can calculate the math behind the strategy. So, I've got data here on the US dollar, the Japanese yen, and the Thai bhat. And, I've pulled data on exchange rates for the US dollar to the yen, the Thai bhat to the yen, and the US dollar to the Thai bhat, for a couple of hypothetical days in September 2018. Now, what we want to do is evaluate whether or not there's an arbitrage opportunity. So, if we were to go from US dollars to Japanese yen, if we took one US dollar, and turned it into as many Japanese yen as possible, how much do we get? Well, one US dollar will buy you 111.89399 yen. The alternative to buying this yen directly, is to go through a third currency, that's where the triangular, in triangular arbitrage, comes from. So, we might look at a lesser-known currency, like,…
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