Triangular Hedging: Estimating the Price Spread Needed to Cover Fees
Summary
The research note examines indirect hedging across three cryptocurrency markets: an ETH/BTC pair, an ETH/USDT pair, and a BTC/USDT pair. It calculates executable-side price differences for two hedge directions, then tracks how a trade changes the combined BTC, ETH, and USDT balances. Fees from each leg are converted to a common BTC basis so they can be compared with the spread. In the first backtest configuration, the spread is smaller than the combined fees and the example loses money.
A second run lowers the configured fee rate and finds that the combined fees nearly consume the observed price difference, leaving a small result close to zero. The note’s practical lesson is that a triangular spread must exceed the costs of all three legs to offer a potential profit. Its evidence comes from one short historical backtest snapshot with assumed fee settings and simulated fills; it does not model broader market conditions, variable liquidity, or slippage in depth. The calculations should be checked before being used as a trading rule.
Key ideas
- Triangular hedging uses three related markets to offset exposure across different quote currencies.
- The executable bid and ask prices determine the spread available in each hedge direction.
- Fees from all three trades must be converted to a common unit and compared with the spread.
- In the shown example, the higher-fee configuration loses money, while reduced fees leave only a small result.
- The result is based on a brief backtest snapshot and does not establish profitability under changing market conditions.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.