Triangular Arbitrage Triangular arbitrage is a process that keeps cross-rates (such as euros per British pound) inline with exchange rates quoted relative to the US. dollar. Suppose that the quoted Euros/Pound cross-rate is lower than the indirect rate, using the dollar as the intermediary currency, i.e. (Euros/Pound)< (Euros/Dollar)× (Dollars/Pound) A trader can conduct a triangular arbitrage. For example, start with euros, buy pounds, then simultaneously sell the pounds for dollars and lastly sell the dollars for euros. Instead of exchanging just two currencies, the trader exchanges three (hence the term “triangular” arbitrage). If the number of euros the trader has at the end of these three transactions is greater than the number of euros at the beginning, there is a profit.
