Forex arbitrage is a forex trading strategy that is used by forex traders to exploit the price differences between two brokers or market in order to earn great profit with minimal risk.

Suppose in one market the EUR/USD is quoted at 1.3002/1.3004, and at the same time in another market the following quotes for the same currency pair: 1.3006/1.3008. If you buy at one market, and simultaneously sell at another market, you will profit 2 pips just from the difference in the quotes.

There are two types of forex arbitrage, Multiple Broker Forex arbitrage and Market Forex arbitrage.

1. Multiple Broker Forex Arbitrage:  When  two or more different brokerages are trading the currency during different prices, leading to an arbitrage opportunity to purchase from the only one with the lower price and sell to the one together with the higher price.

To calculate the odds related to the arbitrage, you need good  Forex Arbitrage calculator. It shows you opportunities of low-risk or risk-free trades on Forex.

2. Multiple Forex Arbitrage: Multiple Forex Arbitrage or Triangular arbitrage is the process of exchanging the initial currency for a second currency, then converting second currency for a third currency, and finally third currency exchanging back to the original currency. The triangular arbitrage only last for short span of time. The understanding of advance software programming and forex market is important to capitalize on gains in one currency versus another currency. Arbitrageurs doesnt actually buy or sell any physical currency, but rather buys or sells a cross rate from one currency to another.

Triangular Arbitrage Opportunity

Suppose you have $1000 and you are provided with the following exchange rates:

1.EUR/USD = 1.3765

2. EUR/GBP = .8254

3. USD/GBP = .6011

Calculating EUR/GBP= EUR/USD * USD/GBP= .8274, while the actual rate of EUR/GBP= .8254. We can see the exchange rate mismatch and an opportunity for a triangular arbitrage. We need to capitalize the opportunity asap before the discrepancy is corrected.

Triangular Arbitrage Example

As an example, suppose you have following currency U.S. dollar (USD), British pound (GBP), and Euro (EUR). The currency pairs are EUR/USD, EUR/GBP and USD/GBP.

1. EUR/USD = 1.3765

2. EUR/GBP = .8254

3. USD/GBP = .6011

The currency pairs are:

1. EUR/USD is 1.3765, which means that you will have to spend about 1.3765 in Euro to buy 1 USD.

2. USD/GBP = .6011, which means that for 1 USD, you can buy about .6011 in GBP.

3. EUR/GBP = .8254, which means that you can buy 1 Great Britain Pound for about .8254 Euro.

EUR/GBP= EUR/USD * USD/GBP= .8274, while the actual rate of EUR/GBP= .8254.

Calculate the Arbitrage:

The currency is traded in units is called lots. Standard lots are blocks of 100,000, while mini-lots are blocks of 10,000. Suppose we have 100,000 USD.

Buy Euros: 100,000 x 1.3765 = 137,650 euros

Convert the Euros in Pounds (GBP): 137,650/.8254 = 166,768 pounds (GBP)

Sell pounds (GBP) for dollars (USD): 166,768 x .6011 = 100,244 USD

Profit: Final Trading Value Investment Value