Introduction to Triangular Arbitrage
Triangular arbitrage refers to a rare but highly profitable opportunity available in the complex realm of currency trading. It arises when exchange rates between three currencies are out of sync, resulting in an inconsistency that savvy traders can capitalize on through algorithmic trades. In essence, triangular arbitrage is the process of exploiting price discrepancies in three-way foreign exchange transactions for riskless profits. This section sheds light on the significance of triangular arbitrage and its workings.
How Does Triangular Arbitrage Work?
The concept behind triangular arbitrage revolves around the idea that exchange rates between currencies should be consistent, with one currency trading equally against all others in a given market. However, due to market inefficiencies or discrepancies in supply and demand, sometimes these rates deviate from their equilibrium values. This divergence creates an opportunity for traders to profit by exploiting the misalignment in exchange rates among three currencies through triangular arbitrage transactions.
For instance, consider a situation where a trader wants to convert dollars into pounds using euros as the intermediary currency:
1. Exchange dollars to euros: Dollars ($) ÷ EUR/USD = €X (exchange rate X is quoted as EUR/USD=1.1586 in this example).
2. Convert euros to pounds: €X ÷ GBP/EUR = £Y (exchange rate Y is quoted as GBP/EUR=1.4600 in this example).
3. Finally, convert pounds back into dollars: £Y x USD/GBP = $Z (exchange rate Z is quoted as USD/GBP=1.6939 in this example).
If the resulting value of $Z is greater than the initial dollar amount used to initiate the transaction, then a profit can be made. For instance, if the exchange rates presented in our example resulted in $1,001,384 instead of the original $1,000,000, the trader would realize an arbitrage profit of $1,384 (assuming no transaction costs or taxes).
This example demonstrates how triangular arbitrage works by taking advantage of a temporary discrepancy between exchange rates. However, it is important to note that these opportunities are rare and short-lived. As soon as traders begin capitalizing on the mispricing, markets tend to adjust swiftly to restore equilibrium, making it crucial for arbitrage transactions to be executed quickly and with large amounts of capital.
In conclusion, triangular arbitrage is a low-risk profit-making strategy employed by currency traders that exploits exchange rate discrepancies in the complex world of foreign currency markets. This form of arbitrage can lead to substantial profits when executed successfully. However, it requires a deep understanding of forex markets, access to advanced trading platforms, and high capital investment for profitable outcomes. In our next section, we will explore an example of triangular arbitrage opportunities in action.
(To be continued)
How Does Triangular Arbitrage Work?
Triangular arbitrage is a unique profit-making opportunity in the foreign exchange market where traders exploit discrepancies between three different currency exchange rates. In simpler terms, this strategy involves exchanging an amount from one currency to another, then converting it to the initial currency through a third currency, all while aiming for a net profit.
To understand how triangular arbitrage works, let’s delve into its underlying concept. Suppose we have three currencies: EUR, USD, and GBP. The exchange rates between these currencies are constantly changing in the forex market. When the exchange rates are not exactly in sync with each other, it creates a potential opportunity for arbitrage transactions.
Let’s use an example to illustrate this concept further. Suppose you have $1,000,000 and the following exchange rates: EUR/USD = 1.1586, EUR/GBP = 1.4600, and USD/GBP = 1.6939. By selling dollars to buy euros (€863,110) using the EUR/USD exchange rate, then converting the euros into pounds (£591,171) based on the EUR/GBP exchange rate, and finally selling the pounds back to dollars ($1,001,384), you would net a profit of $1,384.
Now let’s explore why this arbitrage opportunity exists in the first place. The reason is that international banks make markets in currencies by setting exchange rates. However, they don’t have perfect knowledge of all market conditions and may price their offerings slightly off the real-time cross-exchange rate due to various factors like latency, human error, or other market inefficiencies.
As a result, triangular arbitrage can present itself when two currencies are overvalued against a third one. This discrepancy in exchange rates is often temporary because it gets arbitraged away quickly as traders exploit the opportunity to lock in profits. Therefore, for triangular arbitrage transactions to be profitable, they need to be executed rapidly and at large scale due to the small profit margins involved.
To make the most of this opportunity, many traders employ advanced technology, such as automated trading platforms, to execute arbitrage trades as soon as they appear and before they vanish in a matter of seconds. These platforms use algorithms designed to identify arbitrage opportunities and execute trades automatically when specific conditions are met, maximizing potential profits while minimizing risks.
In conclusion, triangular arbitrage is an intriguing profit-making strategy that requires advanced knowledge, significant capital, and computational power to exploit the discrepancies in exchange rates between three currencies. As we delve deeper into this topic, we will discuss various aspects of triangular arbitrage, including its risks, challenges, automation, requirements, and comparisons with traditional arbitrage strategies. Stay tuned for more insights on this exciting topic!
Example of Triangular Arbitrage Opportunity
Triangular arbitrage is a complex form of currency trading that requires advanced knowledge, large capital, and sophisticated technology to execute. To help illustrate this concept, let’s consider an example involving three exchange rates: USD/EUR = 0.8573, EUR/GBP = 0.9142, and GBP/USD = 1.0967.
To exploit this situation, a trader would follow these steps:
1. Exchange $10,000 for euros at the USD/EUR exchange rate: $10,000 / 0.8573 = €11,636.45
2. Convert euros to British pounds at the EUR/GBP exchange rate: €11,636.45 x 0.9142 = £10,630.83
3. Exchange British pounds back into dollars at the GBP/USD exchange rate: £10,630.83 / 1.0967 = $9,742.64
By completing these trades, the trader would net a profit of $201.71 ($10,652.16 – $10,450.45).
However, it is essential to note that arbitrage opportunities like this do not last long in the fast-moving forex market. In fact, they can vanish within seconds once other traders notice and start exploiting them. Automated trading platforms can help traders execute these trades more efficiently by identifying and acting on arbitrage opportunities faster than a human can process the information manually.
Aside from the execution risk, there are other challenges involved in triangular arbitrage, such as transaction costs and market risks. Transaction costs may eat into profits, while market risks, such as currency fluctuations, could potentially result in losses if the trader is unable to complete all trades within a specific time frame.
Despite these risks and challenges, some traders continue to pursue triangular arbitrage for its potential high returns. In fact, with the increasing automation of trading platforms and the growing popularity of algorithmic trading, opportunities for triangular arbitrage may become more frequent but also more competitive.
In conclusion, triangular arbitrage is an intriguing yet complex strategy for profiting from exchange rate discrepancies in the foreign currency market. It requires substantial capital, advanced knowledge, and sophisticated technology to execute effectively while mitigating the risks involved. As we’ve seen from our example above, the potential rewards can be significant, but they are also short-lived. Stay tuned as we explore further aspects of triangular arbitrage in future sections.
Risks and Challenges in Triangular Arbitrage
Triangular arbitrage may seem like an easy way to make profits, but it comes with its own set of risks that can be challenging for traders. Understanding these risks is crucial for anyone considering entering the world of triangular arbitrage. Here are some of the most significant risks associated with triangular arbitrage:
1. Execution risk: The speed at which trades must be executed in triangular arbitrage makes it imperative that a trader’s execution platform can quickly execute their orders. As mentioned before, market opportunities can only last seconds. A delay in executing the trade can result in missed profits or even losses if exchange rates shift against the trader.
2. Transaction costs: Triangular arbitrage requires large capital to be effective; however, it also involves multiple currency exchanges. Each exchange carries transaction costs that can eat into a trader’s profit margin. These costs, while seemingly small individually, can significantly impact overall profits when trading at scale.
3. Market risk: As with any investment strategy, triangular arbitrage is subject to market risk. Exchange rates fluctuate constantly and can move against a trader in the brief window between entering and exiting trades. This volatility can result in losses even if a trader manages to execute their trade successfully.
4. Regulatory risk: Triangular arbitrage might be considered high-risk due to its potential regulatory implications. Some countries have strict regulations on currency trading or may not allow certain types of algorithmic trades, making it essential for traders to research the specific laws and regulations in their jurisdiction.
5. Counterparty risk: In triangular arbitrage, traders often need to rely on counterparties (i.e., other parties with whom they make a trade) to fulfill their obligations promptly and accurately. If a counterparty fails to complete their side of the transaction, it can lead to significant losses for the trader.
6. Liquidity risk: Triangular arbitrage requires trading large amounts of currency in multiple trades, which can impact liquidity. A sudden drop in market liquidity could lead to difficulties finding a counterparty or executing trades at desirable exchange rates, potentially resulting in missed profits or losses.
7. Technology and infrastructure risk: Triangular arbitrage relies on advanced technology and powerful computers to quickly identify opportunities and execute trades automatically. Traders who do not have access to this infrastructure may find it difficult to compete effectively in the market.
8. Regulatory scrutiny: As triangular arbitrage can be seen as an attempt to exploit small discrepancies in exchange rates, it is under close scrutiny from regulatory bodies. Some may view it as a form of market manipulation and can take legal action against those involved, leading to potential financial losses or even criminal charges.
9. Human error: Lastly, human error can play a significant role in triangular arbitrage. Even the most experienced traders can make mistakes when inputting exchange rates, executing trades, or managing their positions, which could result in missed profits or losses.
In conclusion, while triangular arbitrage offers the potential for substantial profits, it also comes with considerable risks. Understanding these risks is crucial to making informed decisions and minimizing potential losses. By being aware of these risks and implementing appropriate risk management strategies, traders can increase their chances of successfully entering the world of triangular arbitrage.
Automated Trading Platforms for Triangular Arbitrage
Triangular arbitrage is a complex investment strategy that requires both advanced knowledge and sophisticated technology to execute efficiently. Given the transient nature of these opportunities – they can vanish within seconds due to market volatility and rapid trade execution – it’s no surprise that automated trading platforms play an essential role in this type of arbitrage.
Automated trading systems enable investors to create complex algorithms for entering and exiting trades based on predefined conditions. By harnessing the power of these platforms, traders can execute triangular arbitrage transactions faster than humanly possible, often before their competitors.
For example, consider a trader employing an automated algorithm with the following rules: buy EUR/USD when its exchange rate falls 0.01% below the cross-exchange rate (EUR/GBP and USD/GBP) for a given currency pair; sell the purchased euros for pounds at the market rate, then sell pounds for dollars once the opportunity arises. Once these conditions are met, the trading platform executes the transaction automatically, often in fractions of a second.
These platforms can significantly reduce the risk associated with triangular arbitrage by enabling investors to react quickly and capitalize on opportunities before they evaporate. However, their use does not come without challenges, including execution risk – the uncertainty that arises when attempting to lock in a profitable price before it moves past you in seconds.
Also, transaction costs, which can be substantial in foreign exchange markets, must be considered when deciding whether an arbitrage opportunity is worth pursuing. Additionally, traders need to ensure their automated algorithms are efficient and effective, as any errors could result in significant losses.
As mentioned earlier, triangular arbitrage opportunities occur due to market inefficiencies. As more investors capitalize on these discrepancies, markets become more efficient and the frequency of such opportunities decreases. This highlights the importance of employing advanced technology and automation to capture these fleeting opportunities while they last.
By combining expertise in finance, mathematics, and programming, along with a powerful trading platform, investors can turn triangular arbitrage into a profitable investment strategy.
Requirements to Participate in Triangular Arbitrage
Triangular arbitrage is a profitable strategy for currency traders that takes advantage of exchange rate discrepancies through algorithmic trades. However, to participate in this activity, you need substantial capital, advanced knowledge, and powerful computational resources. These requirements stem from the small price differences between exchange rates and the necessity to trade large amounts for profitability.
To execute a triangular arbitrage transaction, one must first identify an opportunity by exploiting exchange rate discrepancies in three currencies – let’s call them EUR/USD, EUR/GBP, and USD/GBP. Once you have identified such an opportunity, the process requires swift action due to the market’s self-correcting nature.
Triangular arbitrage transactions involve exchanging one currency for another, converting it into a third currency, and then reconverting it back to the original currency. For example, suppose you start with $1,000,000 and are presented with exchange rates of 1.1586 for EUR/USD, 1.4600 for EUR/GBP, and 1.6939 for USD/GBP. In this scenario, you can perform the following transactions:
Sell dollars to buy euros: $1,000,000 ÷ 1.1586 = €863,110
Sell euros for pounds: €863,100 ÷ 1.4600 = £591,171
Sell pounds for dollars: £591,171 x 1.6939 = $1,001,384
Subtract the initial investment from the final amount: $1,001,384 – $1,000,000 = $1,384
From these transactions, you would earn a profit of $1,384 (assuming no transaction costs or taxes). However, this example demonstrates that arbitrage transactions require significant capital. In reality, profitable opportunities often involve large sums that can only be effectively managed through the use of automated trading platforms.
To execute these trades at lightning speed and before the opportunity disappears, traders employ sophisticated algorithms to identify discrepancies in exchange rates and facilitate the transaction. However, this strategy comes with challenges like execution risk, market risk, and high transaction costs, which necessitate a substantial investment and expertise in foreign exchange markets.
Automated trading platforms have become essential tools for arbitrage transactions due to their speed and efficiency. They enable traders to set specific rules for entering and exiting trades, and the computer executes these trades automatically based on predefined criteria. While automated trading provides numerous benefits, including the ability to test strategies on historical data, it is crucial to acknowledge its limitations as well.
For example, in high-frequency markets like those dealing with currency arbitrage, there’s a significant risk of not being able to lock in a profitable price before it disappears. Additionally, regulatory issues may arise due to the international nature of triangular arbitrage transactions and the potential for capital movements impacting exchange rates.
In conclusion, triangular arbitrage is an intriguing strategy for currency traders seeking profits through exploiting exchange rate discrepancies. However, this strategy necessitates large capital, advanced knowledge, powerful computational resources, and a deep understanding of foreign exchange markets and their dynamics to be successful. Moreover, automated trading platforms have become essential tools to execute these transactions efficiently while minimizing risks.
FAQ
1. What is triangular arbitrage?
Triangular arbitrage refers to a profitable opportunity in the foreign currency market where three exchange rates are out of balance, allowing traders to make a riskless profit by exploiting the discrepancy through algorithmic trades.
2. How does triangular arbitrage work?
Triangular arbitrage works by identifying an imbalance among three exchange rates and executing three currency transactions in sequence to lock in a profit. These transactions involve selling one currency for another, converting it into a third currency, and then reconverting it back to the original currency.
3. What are the risks associated with triangular arbitrage?
Triangular arbitrage carries several risks such as execution risk (the potential loss of profitable prices), market risk (fluctuating exchange rates), transaction costs (fees charged by intermediaries), and regulatory risk (government restrictions on cross-border capital movements).
4. What tools are required to participate in triangular arbitrage?
To participate in triangular arbitrage, you need substantial capital, advanced knowledge, powerful computational resources, and access to sophisticated algorithms to identify opportunities and execute trades automatically at a high speed. Additionally, traders may use automated trading platforms to minimize risks and improve efficiency.
Efficiency of the Forex Market and Triangular Arbitrage
Triangular arbitrage arises due to market inefficiencies in the vastly interconnected forex market. The foreign exchange market is a global decentralized system that operates 24 hours a day, six days a week, with a daily trading volume exceeding $6 trillion. In this dynamic environment, exchange rates between various currencies are constantly changing, and discrepancies occur due to the vast amount of transactions taking place every second.
These discrepancies in exchange rate pricing present opportunities for traders employing triangular arbitrage strategies. Triangular arbitrage is an advanced trading technique used by experienced traders to exploit pricing inconsistencies among three interconnected currency pairs. To understand this concept further, we’ll examine how it works.
Imagine three currencies – the US Dollar (USD), Euro (EUR), and British Pound (GBP). For triangular arbitrage to be profitable, there must be an inconsistency in their exchange rates against each other. Let’s assume the following exchange rates: EUR/USD = 1.1586, EUR/GBP = 1.4600, and USD/GBP = 1.6939.
By selling dollars to buy euros at 1.1586, then converting those euros into pounds at 1.4600, and finally converting the pounds back into dollars at 1.6939, a trader could net a profit of $1,384 (assuming no transaction costs or taxes). This arbitrage strategy relies on the inefficiencies between exchange rates; if all three rates were consistent with each other, there would be no profit opportunity.
The forex market is an ever-evolving landscape that strives to correct pricing inconsistencies through various factors such as supply and demand, economic indicators, and central bank interventions. However, it’s important to note that these discrepancies occur frequently and only last for a short period. A skilled arbitrage trader with an automated trading system can quickly identify and execute the profitable trade before the inconsistency vanishes, maximizing profits while minimizing risk.
The efficiency of the forex market is dependent on numerous factors such as advanced technology, real-time data, and a vast amount of liquidity. The role of high-frequency automated trading systems has significantly reduced the lifespan of these arbitrage opportunities. However, even with the increased competition in the market, there are still profitable opportunities for those who possess the necessary resources and expertise to capitalize on them.
Limiting Factors for Profitability in Triangular Arbitrage
Triangular arbitrage transactions require large amounts of capital to generate significant profits due to the small discrepancies in exchange rates. For instance, a trader must deal with high transaction costs, including spreads and slippage, which can eat into potential gains. Furthermore, exchange rates can change rapidly, making it essential for traders to execute trades quickly and efficiently.
Transaction costs are an inevitable part of triangular arbitrage transactions. Spreads, the difference between the buy and sell price, can decrease a trader’s profitability since it cuts into the potential gain. In addition, slippage refers to the difference between the expected market price when a trade is entered and the actual price at the time of execution. The smaller the transaction size, the more significant the impact of slippage on profits.
Exchange rates are another limiting factor in triangular arbitrage transactions. Rare exchange rate discrepancies may only last for seconds or minutes before being corrected by the market or arbitraged away. Therefore, traders need quick access to reliable market data and execution capabilities to capitalize on opportunities. Moreover, a trader’s profitability can also depend on the efficiency of foreign currency markets in converting among multiple currencies. The smaller the market depth in less-traded currency pairs, the harder it is to execute trades efficiently and without significant transaction costs or slippage.
Competition from other traders and high-frequency trading algorithms further decreases the profitability of triangular arbitrage opportunities. With automated trading platforms becoming more prevalent and sophisticated, large institutional players and individual traders are constantly scanning markets for potential discrepancies. This competition increases execution risk as trades may be executed before the desired price is reached or after it has passed.
Regulatory factors can also impact the profitability of triangular arbitrage transactions. Some countries may regulate foreign exchange trading, imposing taxes or restrictions on certain types of transactions. Additionally, international regulations like the Basel III Accord have led banks to limit the amount of capital they allocate for proprietary trading activities. Such regulations force traders to reconsider whether the potential rewards justify the risks and costs involved in triangular arbitrage trades.
In conclusion, profitability in triangular arbitrage relies on quick execution, low transaction costs, and a deep understanding of market dynamics. Despite the challenges, many traders continue to pursue these opportunities due to their attractive risk/reward ratio and potential for significant returns.
Triangular Arbitrage vs. Traditional Arbitrage
While triangular arbitrage is an attractive option due to its low-risk nature and potential profitability, it’s essential to understand how it differs from traditional arbitrage. Traditional arbitrage involves buying an asset in one market at a lower price and selling it in another market where the same asset is priced higher. In contrast, triangular arbitrage takes advantage of exchange rate discrepancies between three currencies, as explained earlier. The key differences between these two strategies lie in their risk profile, profitability potential, and market efficiency.
Risk: Traditional arbitrage carries a degree of financial risk because there is no guarantee that the price spreads will remain constant during the time it takes to execute trades in both markets. On the other hand, triangular arbitrage offers a lower risk due to its automated nature and the fact that opportunities only arise when exchange rates become misaligned.
Profitability: Traditional arbitrage’s profit potential is influenced by the magnitude of price discrepancies, while triangular arbitrage profits are determined by the size of the capital being traded. However, as mentioned earlier, triangular arbitrage requires large investment sums to generate a significant return on investment due to small exchange rate discrepancies.
Market Efficiency: Triangular arbitrage opportunities arise from market inefficiencies that may persist for only seconds before disappearing due to the speed at which markets correct themselves. Traditional arbitrage, however, can take longer to execute and may depend on price discrepancies between two markets remaining constant during that time.
In summary, triangular arbitrage is a low-risk yet complex strategy used by traders seeking to profit from exchange rate discrepancies involving three currencies. It requires large capital, advanced knowledge, and computational power, making it an attractive but exclusive niche in the world of forex trading. Traditional arbitrage, on the other hand, involves buying an asset in one market and selling it at a higher price in another market to profit from price discrepancies. Both strategies have their unique risk-return profiles and should be carefully considered before venturing into foreign exchange markets.
Regulation and Triangular Arbitrage
Triangular arbitrage, like other forms of currency trading, is subject to various regulations imposed by financial institutions and governing bodies. Regulations aim to ensure fairness in foreign exchange markets and prevent market manipulation, among other objectives. Understanding how these rules apply to triangular arbitrage can help traders navigate the legal landscape and make informed decisions about engaging in such activities.
Currency markets are highly regulated entities, with international organizations such as the Bank for International Settlements (BIS), the Financial Action Task Force (FATF), and national regulatory bodies setting guidelines and rules. For example, the US Commodity Futures Trading Commission (CFTC) requires traders engaging in forex transactions over $10,000 to register as a commodity trading advisor or an introducing broker, depending on their role and activities.
Triangular arbitrage itself is generally not considered market manipulation but can be viewed as exploiting market inefficiencies, which might be against the rules of some regulatory bodies. For instance, FINRA (Financial Industry Regulatory Authority) prohibits traders from entering into a transaction that they believe will result in an arbitrage profit or loss solely on the basis of price differences between two markets. However, this rule is subject to interpretation and it’s essential for traders to familiarize themselves with specific regulations governing their jurisdiction.
Another significant concern when engaging in triangular arbitrage is tax implications. Depending on the jurisdiction and the individual circumstances, profits from triangular arbitrage might be taxed as capital gains or ordinary income. It’s crucial to consult a tax professional for specific advice regarding tax laws and regulations that apply to your situation.
Automated trading platforms, used extensively in triangular arbitrage, can also fall under regulatory scrutiny. For example, the European Securities and Markets Authority (ESMA) regulates automated trading systems in Europe, requiring compliance with various rules related to market integrity, transparency, and investor protection.
In conclusion, understanding the regulatory landscape surrounding triangular arbitrage is vital for traders considering this profitable strategy. Traders must be aware of the potential risks involved and ensure they remain compliant with relevant regulations, including tax laws and financial institutions’ guidelines. Staying informed about these matters can help ensure a successful and safe trading experience in the complex world of currency markets.
![Golden triangle depicts triangular arbitrage: $1M -></img> EUR -> GBP -> USD for profit’/></p>
<h2>FAQ</h2>
<p>What exactly is triangular arbitrage?<br></br>
Triangular arbitrage refers to a profitable opportunity that arises from exchange rate discrepancies among three currencies in the forex market. This strategy is based on exploiting inconsistencies between direct and indirect quotes (EUR/USD, EUR/GBP, USD/GBP) and involves exchanging an amount at one rate, converting it to another currency, and then converting it back to the original currency.</p>
<p>How does triangular arbitrage work?<br></br>
Triangular arbitrage thrives when exchange rates between three currencies are out of sync. To take advantage of this misalignment, traders convert their capital from one currency to another using two separate transactions: an initial exchange and a final exchange. Profit is earned only if the transaction costs are minimal and the exchange rates revert to their equilibrium.</p>
<p>What risks come with triangular arbitrage?<br></br>
Triangular arbitrage comes with several risks, including execution risk, where traders may not be able to lock in profits before the opportunity vanishes; transaction costs, which can eat into profits or even result in losses; and market risk, where the exchange rates’ movement against a trader’s position could cause losses.</p>
<p>What tools are needed for triangular arbitrage?<br></br>
To participate in triangular arbitrage, traders require large capital, advanced knowledge of financial markets, computational power, and automated trading platforms that can quickly identify opportunities and execute trades before they disappear. Additionally, these traders must have a solid understanding of currency pricing dynamics to minimize risks and maximize profits.</p>
<p>How does triangular arbitrage contribute to market efficiency?<br></br>
Triangular arbitrage plays an essential role in maintaining market efficiency by identifying and eliminating pricing discrepancies in the forex market. Since opportunities for triangular arbitrage are limited, they motivate banks and large financial institutions to adjust their exchange rates accordingly and maintain a balance between the markets. This results in more accurate exchange rate quotes and overall market stability.</p>
<p>Can you provide an example of triangular arbitrage?<br></br>
Yes, here’s an example: Suppose we have $1 million and the following exchange rates – EUR/USD = 1.1586, EUR/GBP = 1.4600, and USD/GBP = 1.6939. With these exchange rates, there exists an arbitrage opportunity:<br></br>
Sell dollars to buy euros: $1 million ÷ 1.1586 = €863,110<br></br>
Sell euros for pounds: €863,100 ÷ 1.4600 = £591,171<br></br>
Sell pounds for dollars: £591,171 x 1.6939 = $1,001,384<br></br>
Subtract the initial investment from the final amount: $1,001,384 – $1,000,000 = $1,384<br></br>
From these transactions, we would earn an arbitrage profit of $1,384. (Note that transaction costs and taxes were not considered in this example.)</p>
<p></p>
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