Definition
Triangular Arbitrage
Triangular arbitrage exploits a pricing mismatch among three currencies, converting through all three to lock in a risk-free profit when the cross rate diverges from the implied rate.
If USDINR, EURUSD and EURINR get briefly out of line, a trader can convert rupees to dollars, dollars to euros, and euros back to rupees to end with more rupees than they started, all in seconds. The chain only profits when the quoted cross rate differs from the rate implied by the two dollar legs.
In deep, electronic markets such opportunities vanish almost instantly as algorithms close the gap, which is precisely what keeps EURINR and other crosses consistent with their dollar components.
Related terms
- USDINRUSDINR is the exchange rate of the US dollar against the Indian rupee, the most-watched currency pair in India and a key barometer of capital flows and import costs.
- EURINREURINR is the exchange rate of the euro against the Indian rupee, a cross pair derived from EURUSD and USDINR rather than traded directly in the interbank dollar market.
- Cross RateA cross rate is the exchange rate between two currencies derived through a common third currency (usually the US dollar) rather than quoted directly.
- Currency Pair NotationCurrency pairs are written as a six-letter code such as USDINR or EURINR, naming the base currency first and the quote currency second, with the price showing how many units of the quote currency buy one unit of the base.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.