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Granted, the last two articles assumed that the quotes did not include a bid/ask spread in their quotes (this was discussed further in the previous article over the limitations to arbitrage section). So what would happen if such a spread were applied through-out the un-guaranteed and very quick-and-dirty dataset?

Some quick research highlighted a 50 pips spread over the USD/CNY rate. I’ve therefore applied the same percentage spread over all other crosses. This actually produces a wider than standard market spread for most of the majors present in the basket to USD. I suppose more transaction costs can’t hurt in double checking the results.

Does The Arb Still Hold?

Yes, unfortunately, it does. We do lose a few days across the year, but for over 270 days, the return is net positive, negative over 30 days only. The return on average does get reduced to roughly 10 basis points. This goes back to my initial assessment, a consistent 30 BP gain is simply too much to just discount away, even when transaction costs are taken into account.

Results with the spread calc are available in the attached CSV file below. The same equal weighting (0.25) factors were used across the basket as in the first model (read: Arbitraging the FX Windmills).

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