Triangular arbitrage refers to the activity of using the spread of foreign exchange in three foreign exchange markets to buy cheap and sell expensive at the same time to earn profits. Triangular arbitrage is also called indirect arbitrage.

Suppose London foreign exchange market:-1= USD 2.

Paris foreign exchange market-1 = FR 10

New york foreign exchange market $ 1=Fr5.

In this case, an arbitrage trader buys $200 at 100 in London, 1000 in new york foreign exchange market and 100 in Paris foreign exchange market, without considering the handling fee for buying and selling foreign exchange. At the end of the transaction, the arbitrageur takes out 100 and takes back 100. Not a penny has been increased, and the telegram fee and handling fee have also been wasted.

This example shows that the triangular arbitrage price is not worth carrying out, unlike the two-corner arbitrage. First of all, it depends on whether the cross exchange rate between the three currencies mentioned above is consistent with the open exchange rate. Cross exchange rate is also called arbitrage exchange rate, and the exchange rate between two currencies is indirectly calculated by the exchange rate between two currencies and the currency of a third country. According to the above situation, in London foreign exchange market, 1 = 2 USD, in Paris foreign exchange market, 1=Fr 10, from which we can get 2 USD =Fr 10, 1=Fr5.

This $ 1=Fr5 is calculated by using the open exchange rate of the pound against the dollar and the open exchange rate of the pound against the franc. This exchange rate is exactly the same as the open exchange rate of $65,438 +0=Fr5. Similarly, according to the exchange rate between the dollar and the franc, the exchange rate between the dollar and the pound can also be calculated, and the arbitrage exchange rate between the pound and the franc is exactly the same as the open exchange rate. From this, it can be concluded that if the arbitrage exchange rate is completely consistent with the open exchange rate, there is no condition for triangular arbitrage and triangular arbitrage cannot be carried out. Only when the arbitrage exchange rate is inconsistent with the open exchange rate can we carry out triangular arbitrage and make a profit. For example:

On the London foreign exchange market, 1 = 2 USD.

In the Paris foreign exchange market-1 = FR 10

In new york foreign exchange market, 65438 USD +0 = 6.

According to the exchange rates of pound and dollar, pound and franc in London and Paris foreign exchange markets, the arbitrage exchange rate of dollar and franc is 65438 USD +0=Fr5, while the open exchange rate of dollar and franc is 65438 USD +0=Fr6. It can be seen that the arbitrage exchange rate is inconsistent with the open exchange rate, which provides conditions for engaging in triangular arbitrage. The arbitrator paid 100 to buy $200 in London and 1200 in new york foreign exchange market and 1200 in Paris foreign exchange market. The arbitrator takes out 100, takes back 120, and the triangular arbitrage profit is 20.

Triangular arbitrage plays the same role as two-corner arbitrage in the foreign exchange market. When the open exchange rate of US dollar and franc is inconsistent with the cross exchange rate, and the open exchange rate is higher than the cross exchange rate, arbitrageurs will increase the supply of US dollars and sell US dollars at high prices to buy francs. The supply of dollars increased, the price of dollars gradually decreased, and the price of francs gradually increased. Finally, the price of US dollar fell to 1 US dollar =5 francs, which made the cross exchange rate consistent with the open exchange rate and eliminated the condition of triangular arbitrage. Therefore, triangular arbitrage can also adjust the supply and demand relationship of three different foreign exchange markets, making the foreign exchange market run more efficiently.

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