A SYSTEM FOR ANALYSIS AND SIMULATION OF TRIANGULAR ARBITRAGE STRATEGIES IN THE FOREIGN EXCHANGE MARKET

Abstract

The aim of this paper is to examine whether it is possible to seize the triangular arbitrage opportunities in the foreign exchange market, and under what conditions. First the descriptive characteristics of arbitrage opportunities that occur between the currency pairs are analyzed, and further the profitability of the triangular arbitrage strategies is investigated. For that purpose, an automated trading system is developed. The proposed system is composed of several components where each one provides analysis for a specific arbitrage characteristic. After the system structure is given, a set of trading strategies is described and further tested. The simulation results are presented along with the analysis of profitability for the tested strategies and conditions under which they might make a profit. The arbitrage strategies are simulated for the selected currency pairs based on their exchange rate movement in the year 2012 and 2013.