Hsbc Fx Trading Platform – Three Point Arbitrage (TPA)

Hsbc Fx Trading Platform

Three Point Arbitrage is based on the concept of “Relative Arbitrage” and was designed to exploit price disparities among three currency pairs. It is one of the Forex Hedge Fund Strategies used to capitalize on the triangular relationship between two hard currency pairs and their respective cross rates. This triangular relationship provides an effective source for arbitrage opportunities due to the fact that the cross rate of two currencies do not always coincide with what the actual cross rate should be based on the rate of the two dollar pairs in consideration. For example, suppose we observe the following exchange rates for USDJPY, EURJPY, and EURUSD:

USDJPY — Barclay quoted 106.05/08

EURUSD — HSBC quoted 1.2900/03

EURJPY — UBS quoted 136.70/73

We have set out to find a market inconsistency between EURJPY, EURUSD and USDJPY. The significance of the EURUSD pair is to obtain a rate to correlate with the EURJPY to then calculate the implicit sell position of JPY. Looking at the rates shown, the EURJPY is 136.73, EURUSD is 1.2900, and USDJPY is 106.05. Using the EURJPY and EURUSD rates, a selling yen rate is calculated to be 105.99 (EURJPY divided by EURUSD yields USDJPY). The calculated USDJPY can then be compared to the initial USDJPY rate 106.05. We recognize an existing profitable hedge and have the opportunity to lock in 6 pips. Although this might seem like an arduous task, many funds as well as foreign exchange publications validate this to be a proven and profitable method. Hsbc Fx Trading Platform

TPA Forex Hedge Fund Strategies in more detail:

If the exchange rate (Currency1 ‘C1’ per Currency2 ‘C2’) is less than the implied cross-rate (C1 indirect quote)/(C2 indirect quote), then buy C1 with dollars, trade C1 for C2, and trade C2 for dollars.
If the exchange rate (C1 per C2) is above the implied cross rate (C1 indirect quote)/ (C2 indirect quote), then buy C2 with dollars, trade C2 for C1, and trade C1 for dollars.

In the above example the implied EURJPY is 136.80/83 (USDJPY x EURUSD = EURJPY) and UBS has posted a quote EURJPY of 136.70/73 so there is an arbitrage opportunity!

Step One: Convert $1,000,000 USD into ¥106,050,000 YEN ($/¥ = 106.05)

Step Two: Convert ¥106,050,000 YEN into EUR775,616.20 EURO (EUR/¥ = 136.73)

Step Three: Convert EUR775,616.20 EURO back to $1,000,544.80 USD (EUR/$ = 1.2900)

Profit per round trip = $544.80 Hsbc Fx Trading Platform

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