Module 6: FX Quotes → Cross Rates → Triangular Arbitrage
Plain classroom style. Focus: (1) read a quote, (2) flip to reciprocal, (3) cross rate triangle,
(4) triangular arbitrage, (5) a short Bid–Ask section + video.
Theme
1) The ONE rule
EUR/USD = 1.08 means:
1 EUR costs 1.08 USD
Base = first currency. Quote = second currency.
The quote is the price for 1 unit of the base.
Student translation (super simple)
Base = what you are buying (the “1 unit”).
Quote = what you pay with.
BASE/QUOTE = price of 1 BASE in QUOTE
Buy / Sell the pair
Buy EUR/USD → buy EUR (base) and sell USD (quote).
Sell EUR/USD → sell EUR (base) and buy USD (quote).
2) Reciprocal (flip the quote)
Rule: If A/B = x, then B/A = 1/x.
Reciprocal
—
—
Show the math (hidden)
—
3) Cross rate (triangle + “start with 1000” walkthrough)
Goal: you know 2 edges of the triangle → compute the missing edge.
Example: If you know EUR/USD and USD/JPY,
you can compute EUR/JPY.
—
—
Computed missing edge
—
—
Walkthrough (start with 1000)
—
Unit-cancel trick
—
Show the hidden math (short)
—
4) Triangular arbitrage
Start with some currency (default 1000). Convert 3 times. End back in the starting currency.
If you end with more than you started, the quotes are inconsistent → arbitrage (in frictionless math).
Haircut: OFF
Haircut demo: each conversion loses 0.20% when ON.
Loop result
—
—
Step-by-step story (this is what your students read)
—
Step table (compact)
—
5) Bid–Ask spread (brief)
Dealer rule: Dealer buys BASE at BID and sells BASE at ASK.
Memory trick: Buy = Bid (dealer buys from you) • Sell = Ask (dealer sells to you)
Example (1 line)
If EUR/USD = 1.1000 / 1.1004 (Bid/Ask):
You BUY EUR → you pay the dealer’s ASK → 1.1004 USD per EUR
You SELL EUR → you receive the dealer’s BID → 1.1000 USD per EUR
Why you care: spreads/fees usually erase tiny triangular “profits.” (So real arbitrage is rare.)
Videos
Optional support videos. If embeds are blocked, use the “Open on YouTube” buttons.