A Heuristic Exercise on Triangular Arbitrage in the Currency Market在货币市场上的一种启发式炼三角套汇.docVIP

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A Heuristic Exercise on Triangular Arbitrage in the Currency Market在货币市场上的一种启发式炼三角套汇.doc

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A Heuristic Exercise on Triangular Arbitrage in the Currency Market在货币市场上的一种启发式炼三角套汇

On Triangular Arbitrage in the Currency Market Yeomin Yoon, Seton Hall University Youngna Choi, Montclair State University (Prepared for the Presentation at the Korea Monetary and Finance Association Annual Meeting Scheduled for May 28-29, 2004) Contact Author: Yeomin Yoon, Ph.D. Professor of Finance International Business Stillman School of Business Seton Hall University South Orange, New Jersey 07079-2692 Phone: (973) 761-9229 Fax: (908) 273-1991 E-mail: yoonyeom@shu.edu On Triangular Arbitrage in the Currency Market Typical international finance textbooks explain the triangular arbitrage process via numerical examples, using a single quote per bank, i.e., assuming no bid and asked spread or no transaction cost. In the real world, however, banks always use bid and asked prices when they announce their currency quotations and this makes the explanation or derivation of the arbitrage conditions rather complicated. This paper provides a rigorous but simple derivation of triangular arbitrage conditions based on bid and asked prices. INTRODUCTION Until recently, the pervasive practice among bank dealers was to quote all currencies against the U.S. dollar for trading among them. Now, however, a growing percentage of currency trades do not involve the dollar [Shapiro, 2003]. For example, German or British banks may quote the euro in terms of the pound sterling. Currency traders are continually alert to the possibility of taking advantage of exchange rate inconsistencies in three different money centers, through “triangular currency arbitrage” transactions. Typical international finance textbooks explain the triangular arbitrage process via numerical examples, using a single quote per bank, i.e., assuming no bid and asked spread or no transaction cost. [Eiteman, 2004; Levtich, 1998; Madura, 2003, Shapiro, 2003; Eaker, Fabozzi and Grant, 1996; Grabbe, 1991; Kim and Kim, 1999]. Such numeric examples typically compare market rates wi