Please collect the foreign exchange rates data of any day
Instructions: Please collect the foreign exchange rates data of any day during 2/1-4/10/2021. Use the date to create two numerical cases of arbitrages: One triangular arbitrage
Please collect the foreign exchange rates data of any day
Please collect the foreign exchange rates data of any day during 2/1-4/10/2021. Use the date to create two numerical cases of arbitrages:
One triangular arbitrage and the other is rectangular arbitrage.
Please ignore the transaction costs (bid-ask spreads). Please briefly describe the cases with necessary sentences and equations.
More Details:
What is a Triangular Arbitrage Opportunity?
A triangular arbitrage opportunity is a trading strategy that exploits the arbitrage opportunities that exist among three currencies in a foreign currency exchange.
The arbitrage is executed through the consecutive exchange of one currency to another when there are discrepancies in the quoted prices for the given currencies.
A triangular arbitrage opportunity occurs when the exchange rate of a currency does not match the cross-exchange rate.
The price discrepancies generally arise from situations when one market is overvalued while another is undervalued.
The nature of foreign currency exchange markets limits the price discrepancies between different currencies to a few cents or even to a fraction of a cent.
Therefore, the transactions in a triangular arbitrage opportunity involve trading large amounts of money.
In addition, a trader must be aware of the transaction costs.
It is possible that high transaction costs may erase gains from the price discrepancies.
Triangular arbitrage opportunities rarely exist in the real world. This can be explaine d by the nature of foreign currency exchange markets.
Forex markets are extremely competitive with a large number of players, such as individual and institutional traders.
However, the strong presence of high-frequency traders makes the markets even more efficient. Thus, the number of available arbitrage opportunities diminish.