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After accounting for the bid-ask spread, the potential profits gained from triangular arbitrage will be __________ the potential profits if the bid-ask spread were ignored.

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User Pragnesh
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1 Answer

5 votes

Final answer:

The potential profits gained from triangular arbitrage will decline substantially after accounting for the bid-ask spread.

Step-by-step explanation:

After accounting for the bid-ask spread, the potential profits gained from triangular arbitrage will decline substantially compared to the potential profits if the bid-ask spread were ignored.

In triangular arbitrage, traders take advantage of differences in exchange rates between three currencies to make a profit. However, the bid-ask spread, which represents the difference between the buying and selling prices of a currency, reduces the potential profits.

For example, if the bid-ask spread is 0.05 and a trader wants to exchange USD to EUR to GBP and back to USD, the bid-ask spread will reduce the profits gained from the difference in exchange rates.

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User Hugh Bothwell
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