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You can dowload the following Excel file that implements the triangular arbitrage. Just replace the numbers and currencies with yours and the solution to check your outcome. Hope this helps :)


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Your reasoning is correct. To answer your last question: the current prices alone don't decide how many shares to sell and buy in each of the stocks. That is decided by the hedge ratio. In fact, the whole point of the hedge ratio is to assume that it is the ratio that the stocks will revert back to over time. So if we denote the spread at time $t$ by $s_t$ ...


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It is correct because a 2.50pct gain followed by a 2.44pct loss gets you back to where you started. I.e. (1+0.025)(1-0.0244)=1.


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The following link has a good summary of a typical pair trading strategy: https://www.quantstart.com/articles/Backtesting-An-Intraday-Mean-Reversion-Pairs-Strategy-Between-SPY-And-IWM It actually has full python code as well. It doesn't include a cointegration check though. Edit: if X and Y are cointegrated: calculate Beta between X and Y ...


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Consider two options with maturity $T$ that only differ in their exercise styles, one being European (holder can only exercise at $T $), the other American (holder exercises when it's best for him/her). These options need not necessarily be vanilla options. Let us further denote by $I (S_t) $ the intrinsic value of these contigent claims at time $t $, i.e. ...


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The European call price converges to zero as the underlying price converges to zero, reflecting the vanishing probability of exercise.At the other extreme, the European call price converges to the discounted value of the difference between the asset price and the strike.For intuition note that the probability of exercise converges to one as $S_t$ becomes ...



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