Saturday, August 20, 2011

## common FX arbitrage scenarios

As in other financial markets (FI, options, forwards...), arbitrage is probably #1 force at play constraining public quoted prices. In FX, there are a couple of major arbitrage scenarios, and each is extremely important to real world pricing algorithms

* tri-arb (total 6 bid/ask numbers on 3 currency pairs)
* Int Rate Parity. See [[Complete guide]]
* arb between FX futures and spot markets. Bear Sterns used to do these arbitrage trades.

IRP is at the heart of forward point calculations.

IRP is the crucial link between the money market and FX forward market prices.

Tri-arb is at the heart of cross rate derivation.

How about fx options quoted on AB, AC and BC? I believe there are arb-constraints on the quotes.

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