FX Triangular Arbitrage Identification - Quant Trader Interview Question
Difficulty: Medium
Category: Conditional Expected Value
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Topics: arbitrage, fx, triangular-arbitrage, currency
Problem Description
You are a currency trader monitoring live FX rates. You observe the following quotes:
EUR/USD = 1.1000
GBP/USD = 1.2500
EUR/GBP = 0.8700
Identify the correct sequence of trades to execute a triangular arbitrage and profit from these misaligned exchange rates. Assume you start with EUR 1,000,000 and can trade any amount at the quoted rates without affecting the prices.
Important: Transaction costs are negligible. The goal is to identify the sequence of trades that will generate a profit.
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