What occurs during triangular arbitrage?

During triangular arbitrage, a sequence of currency conversions occurs that exploits discrepancies in exchange rates between three currencies. This type of arbitrage takes advantage of the differences in the bid and ask prices of currencies across different markets.

For instance, if the exchange rates among three currencies do not align as they should, a trader can convert one currency into another, then convert that resultant currency into a third currency, and finally convert it back to the original currency. The goal is to end up with more of the original currency than started with, capturing the profit from the ineffective pricing of the currencies involved.

This process requires swift execution because price discrepancies can quickly disappear as the market adjusts. It’s an important concept in foreign exchange markets, highlighting how efficient market mechanisms function and helping to ensure that exchange rates remain consistent across different platforms.

The other options describe different investment strategies or currency management techniques that do not directly involve taking advantage of mispriced currencies through simultaneous exchanges.