What is Triangular arbitrage

Question

What is meant by the Triangular arbitrage?  Explain about the condition which provides rise to opportunity of the triangular arbitrage?

Answer 1

Triangular arbitrage is defined as the procedure of trading out of the U.S. dollar into the second currency, then trading it for the third currency, which is then traded for the U.S. dollars. Aim is to earn an arbitrage profit through trading from second to the third currency when direct exchange between two is not in the alignment along with the cross exchange rate.

Mostly, though not all, currency transactions should go through the dollar.  Some of banks specialize in forming direct market between the non-dollar currencies, pricing at narrower bid-ask spread rather than the cross-rate spread.  Nonetheless, implied cross-rate bid-ask quotations force a discipline over non-dollar market makers.  In case their direct quotes are not in consistent with cross exchange rates, a triangular arbitrage profit is really possible.