1.

What is meant by short peak and fat tail property of distribution of algorithm rate of
product. What this structure depicts about triangular arbitrage?
Ans. fat tail is a probability distribution which predicts movements of three or more standard
deviations more frequently than a normal distribution. there are two types of the rate product.
One is based on the arbitrage transaction in the direction of dollar to yen to euro to dollar. The
other is based on the transaction in the opposite direction of dollar to euro to yen to dollar. The
probability density function of the rate product has a sharp peak and fat tails while those of the
three rates do not. It means that the fluctuations of the exchange rates have correlation that
makes the rate product converge to the average.
Normally sharp peak and fait tails are related with a high kurtosis, it means whenever the sharp
peak round the mean price of distribution and there will be a sever outcome fait teal either
positive or negative. The essential reason of the sharp peak and fat tails. If we had c=1, or a=0
(without the interaction), the noise F at every time step would accumulate in w and the
probability density function of w= v-e would be Gaussian due to the central limit theorem. If we
have c<1, or a>0 (with the n interaction), the noise at the past time steps decay as c. The
sharp peak property of the logarithmic plot of the likelihood distribution function of
the charge product implies that the fluctuations in the three change costs included in the learn
about are correlated in such a manner that they lead to the fee product coming closer to
its common price of m, which is nearly 1. The fat tail property implies that extreme fluctuations
away from the mean do once in a while occur. When this happens, triangular arbitrage end
up possible, as the correlation of the fluctuations of the
three exchange fees permit for brief durations the place equilibrium is now not reached.

2. What procedure this research paper has adopted for detecting the triangular arbitrage
opportunity?
Ans. The procedure which this paper has adopted for detecting the triangular arbitrage
opportunity are as fellow:
 First of all, the author analyzes actual data showing that the product of three foreign
exchange rates (the yen–dollar rate, the yen–euro rate and the dollar–euro rate), has a
narrow distribution with fat tails and also the date taken from January 25, 1999 to March
12, 1999 except for weekends.
 Secondly, in order to explain the behavior, the author introduce a new model that takes
account of the effect of the triangular arbitrage transaction as an interaction among the
three rates.
 3. What is the role of probability in triangular arbitrage? Why expectation through are
required in this research study?
Ans. If opportunity for gain due to disequilibrium in cross exchange rates of three currencies
exist, it indicates that there is a possibility of triangular arbitrage. It is a risk-free activity, the
possibility to make a profit relies upon how faster the arbitrager acts, because the opportunity to
make profit is short since rates of foreign currencies change rapidly involved in bidding and
offering. Whenever probability involve in cross buying and selling of currencies, then triangular
arbitrage become speculative activity. In speculation, this becomes closer to a swap rather than a
foreign exchange transaction. Since speculation deals with expected future events, the
probability of risk increases, and this is no longer a riskless arbitrage opportunity.
Result of this paper based on several assumptions as it is also indicating the role of expectations.
Arbitrage opportunities are not lasting long in the market, as the very act of arbitrage itself brings
the rates closer to equilibrium and the disparity in the rates is eliminated. Hence for the study to
research on how feasible the arbitrage opportunity is, it has to make certain assumption.
1. The study assumes that the probability of potential arbitragers transacting immediately at
bid ask prices is high, as information reaches them instantly.
2. The study assumes that once the arbitrager has the information, he or she will identify
discrepancies in the quoted rates, and will be able to act on this information. The author
uses the term Trec (seconds for how long it takes the arbitrager to recognize the
opportunity) and Texe (seconds for how long it takes him/her to act on it.
3. The study assumes that the arbitrager will always acts on an opportunity once it is
recognized. The role of expectations is thus high in the model applied in this study, to
show how an arbitrage opportunity can be feasible.
4. How triangular arbitrage can be identified through rate of product? Explain with valid
reason.
Ans. When the rate of product is greater than 1, it means arbitrage opportunity exist. The reason
is that the three currencies fluctuate in a such way that there is a gap in equilibrium and this gap
will allow for profit to be made from arbitrage.

5. From the analysis of this research paper how would define the feasibility of triangular
arbitrage? What is the role of distribution in identifying feasibility?

Ans. The author analyzes the duration of the triangular arbitrage opportunities and calculate
whether an arbitrager can make profit or not. It means that feasibility occur when the rate of
product stays greater than 1 for long enough for a person to check if opportunity for an arbitrage
exist or not. As well as in order to confirm the feasibility of the triangular arbitrage, this paper
simulate the triangular arbitrage transaction using the time series data and also assumed
arbitrager transacts whenever the arbitrager recognizes the opportunities.