What is an example of currency arbitrage?

For example, two different banks (Bank A and Bank B) offer quotes for the US/EUR currency pair. Bank A sets the rate at 3/2 dollars per euro, and Bank B sets its rate at 4/3 dollars per euro. In currency arbitrage, the trader would take one euro, convert that into dollars with Bank A and then back into euros with Bank B.

How does arbitrage work?

If a currency, commodity or security—or even a rare pair of sneakers—is priced differently in two separate markets, traders buy the cheaper version and then sell it at the higher price to make money. Arbitrage is an investing strategy in which people aim to profit from varying prices for the same asset in different markets.

How to arbitrage the forex market?

One of the common arbitrage techniques involves buying and selling spot currency against the corresponding futures contract. Another technique employed by traders to arbitrage the Forex market is triangular arbitrage. The technique takes advantage of discrepancies in exchange rate using three related currency pairs.

What is locational arbitrage?

Locational arbitrage is the most common type of forex arbitrage and involves two currencies. We have already given an example of this type of arbitrage above. Let us take another example, but this time with a Bid/Ask spread. Suppose Bank A has USD 1.52/1.57 for GBP, while Bank B quotes USD 1.58/1.60.