ABSTRACT
There are several general principles that may be developed about how to extract arbitrage opportunity, whether this occurs in the spot exchange market triangle, the dollar deposit/mark deposit/dollar-mark swap market triangle, or in the many other triangular formations. Arbitrage by market-makers is likely to occur more rapidly than is one-way arbitrage by the trading public, in response to the appearance of a differential between rates in the Luxemburg and Frankfurt markets. This chapter introduces some symbols to simplify the formal presentation of how triangular arbitrage opportunity may arise in the dollar deposit/franc deposit/dollar-franc swap triangle. It summarises four principles of triangular arbitrage. The chapter looks at the mechanics of triangular arbitrage in the swap markets. If arbitrage is efficient in each of the swap/deposit market triangles, and liquidity of the swap markets is significantly less than of the deposit markets, then arbitrage opportunity should not ever be present in the swap market triangle.
