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International currency markets are highly liquid, with near-instant transfer of knowledge between trading centres. This means that any arbitrage opportunities tend to get resolved within seconds. To put it simply, the thing you tried to do, of trading two currencies via a third, is something that lots of real-world currency traders, and their automatic ...


6

Nobody has to loose in an arbitrage. Economic relationships are not necessarily zero-sum (in fact often they will not be zero-sum). For example, if apples in city A are sold for ${\\\$}5$ and apples in city B can be sold for ${\\\$}8$, and we assume zero transaction cost there will be an arbitrage opportunity to earn ${\\\$}3$ riskless profit per apple by ...


4

It's important to distinguish between the effects of arbitrage on: a) the direct parties to arbitrage transactions; b) other agents in the markets in which the arbitrage takes place. Suppose arbitrageurs buy a good in market A in which its price is \$1 and sell in market B where its price is \$2. Assume further that in each market those prices have freely ...


3

You are wrong/vague here: the rupee (INR), is appreciating against, say, the USD, it possibly means that there is a high demand for the former. If the rupee becomes more expensive w.r.t. the dollar, demand for the rupee usually decreases, as Indian exports are now more expensive to pay for when measured in dollars, and hence fewer people seek to convert ...


3

Is it possible for India to have a Free Banking arrangement with one singular national currency? Under free banking you would only end up with single currency if one bank manages to become a monopoly on issuing the currency. That is possible, although at least historically it did not occurred under free banking systems. Also this would be in essence ...


3

China's currency, the yuan (CNY), only partially reflects what goes on in China's economy. It doesn't trade freely; the Chinese government sets an official rate for it every day and only allows it to fluctuate 1 percent around that level every day. In fact, it doesn't even vary that much; the average difference between the high and the low price ...


3

I couldn't read the FT article... but... According to this article here, China imports a lot of raw material from Australia. This means that if Chinese economy is doing well, they import a lot of stuff from Australia... hence AUD will appreciate. This news piece, for example, says that as China is hit with new tariffs, AUD falls. This is because the ...


3

Buy and sell rates are different because the currency vendor wants to make a profit and is also taking some risk with the exchange. It is possible that she cannot unload all the CADs they buy from you immediately and then perhaps in the future they will depreciate. (Perhaps they will appreciate. It is uncertain, hence there is risk.) The same applies to ...


2

Used to be capital controls. You could only buy dollars (or any other foreign currency) through official channels at the official favorable rates by providing documentation displaying need for said currency (e.g. Travel or import documents).


2

When you lend Spain 10 million Deutsche marks, the loan is denominated in a foreign currency: they have to return you 10 million Deutsche Marks (ignoring interest for the moment). But the Spanish earn their income in local currency. If in the meantime their local currency depreciates relative to the Deutsche Mark, the value of the repayment becomes greater ...


2

An EME's government collects taxes in domestic currency. If it issues debt in foreign currency and the domestic currency depreciates, the value of foreign currency-denominated debt increases. For example 1 000 000 000 USD is due at some date. If the exchange rate is 1 peso per dollar the government has to collect 1 000 000 000 pesos to pay it off. If the ...


2

Normally in order to full dollarization to occur there will be some conversion rate at which debt denominated in old currency is converted into new one. For example, according to the World Bank definition of full dollarization: All government and private debt under full dollarization is denominated in dollars, and both public and private accounts must be ...


2

The area of research you are looking for is market microstructure, the study of how markets work and the process of price formation. Naturally, this means studying liquidity, information diffusion, uncertainty, and dynamic games. There is not a lot of mechanism design in market microstructure -- though work along those lines would certainly be welcomed. For ...


1

does the exchange rate not account for the cost of living? Yes it does, but only indirectly and among other superseding factors that reflect better the particularities of each economy. Forcing the COL to be an artificially greater driving factor in determining an exchange rate would cause severe distortions and inefficiencies to the markets. Why isn't the ...


1

" Does that not mean a lot of rupees flowing into circulation in the country?" no. it means other currencies are flowing into the country, eg USD. then locals will go to their banks and exchange USD for RUPEE. There will be no new RUPEES created (unless the crazy scenario of all the banks run out rupee and them needing the central bank to print ...


1

Quoting Wikipedia: Bimetallism[a] is a monetary standard in which the value of the monetary unit is defined as equivalent to certain quantities of two metals, typically gold and silver, creating a fixed rate of exchange between them.[3] Let's suppose that France says 1 ounce of silver is F1 (1 franc) and one ounce of gold is F80. And let's suppose that ...


1

Quick and easy way is to think of a foreign currency (let's call this USD) as another good with its own demand and supply. Imports and exports When a country imports a lot (assuming it imports from the US or the invoice is in USD), the importers will need to pay for these goods in USD. To do this, they go to a bank (roughly speaking) and buy USD, pay for ...


1

Well in principle you could. Let's suppose there are two countries that do not trade a lot. Then even if their economic growth is relatively similar, we should not expect their exchange rate to be 1:1. The exchange rate is a price, so if country A likes more the goods and services from country B than vice-versa, you should expect currency B to have a ...


1

There is no economic reason for currencies to do so. There might be psychological reasons, but it seems that is not the case, as (for example) the gap between the Indian rupee and the US dollar has been steadily widening. https://www.poundsterlinglive.com/bank-of-england-spot/historical-spot-exchange-rates/usd/USD-to-INR There have also been cases where ...


1

When it is said that currencies are 'fixed' against each other, they are maintained fixed. The exchange rate will still keep fluctuating, as there is obviously still a supply of and demand for the currency. The goal of the central bank is just to keep it within a certain range. In the case of a gold standard, the central bank basically guarantees gold as ...


1

What you're describing doesn't work on the open market, where any arbitrage opportunity is scooped up within milliseconds by thousands of trading algorithms. That's because currency markets are perhaps the most liquid market of all markets - primarily traded using derivatives anyway, and able to reconcile nearly instantly. Supply and demand are not very ...


1

@Toby comments noted, I will attempt an answer. First, the FX market is international so you cannot tell whether the foreign currency seller is domestic or foreign. However, if it is a foreign buyer, they will typically reinvest the dollars in either a commercial or financial asset such as a Treasury bond, which could result in the remittance of the dollars ...


1

This question can be answered once a few facts are realized. The Central Bank has a monopoly on the production of currency; The Central Bank can purchase foreign currency by using currency it has either already produced but stored in its vault or by producing new units of the currency; The currency that the Central Bank has produced but stored in its vault ...


1

Exchange rates are prices. Just like any other price, they change based on supply and demand. Country A's currency appreciates relative to B if the citizens of country B want county A's currency. Why does B want A's currency? Typically for the purpose of buying the goods, services, and investments produced by A. So what would be some examples of events ...


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