Is international currency dealing nothing more than smoke and mirrors?

Question

OK, so someone sells dollars and buys euros, and, because of the exchange rate, makes a packet of money, for example. Nothing was produced and sold, and no service was provided and paid for. So the profit from the transaction comes literally from nowhere. So how does one spend what does not exist? Is anyone out of pocket? It's all a magical mystery. How can we run a world this way?

Answer 1

There are a few things in currency markets.

First there is arbitrage.
This is when I exchange my US$100 for Yen 12,000 in Japan (exchange rate US$1 to 120JPY), then take the 12,000Yen and sell it back for US$110 (exchange rate US$1 to 109JPY) in Singapore. My profit is US$9. This is called arbitrage, and the service I am performing is making sur ethat the echange rates are equivalent across the worldwide exchanges. Basically as many people do the same, soon, the exchange rates US$ to JPY would be equalised in Japan and Singapore, say US$1 to JPY115.
The usefulness is that there is transparency and you know what you are getting; someone in Japan who wants US$ to buy something in the US$ can get a 'fair' exchange rate anywhere, without having to spend money/time looking for a 'good rate'.

A second thing is futures.
Futures are basically a promise to pay a certain price for something in the future; for example I can promise to buy JPY at US$1 to 120JPY in 3 months time. May be in a week's time, there is news that the unemployment rate in the US went up; this makes people lose faith in the US$, and people expect the dollar to weaken. So the future value of US$1 is say JPY130. I can then try to find someone else to buy my future contract and pocket the profit, or I can wait it out. Three months after, as the futures contract matures, if the exchange rate is then US$1 to 140JPY, I am paying only 120JPY, which I can resell and make 20JPY per US$.
The service I have performed is that of bearing the exchange rate risk. If the person who bought the promise from me was a Japanese farmer who uses JPY, then I allowed him to plan his crop assuming he would get 120JPY for each US$ he receives for his rice. In this case, he would have gained more JPY had he waited, but I bore the exchange risk, and thus made a profit.

The Japanese farmer could have done better if he had bought an option.
An option is exactly what it says, instead of an iron-clad price as above, it allows him to choose whether he wants to sell his US$ on the spot market (US$1 to 140JPY) or the fixed price I am offering (US$1 to JPY120). He will not exercise his option and sell on the open market. In general I get a transaction fee for my efforts of bearing the risk which he pays.

Third, there is pure speculation.
This is buying and selling out of nowhere. But these people are 'betting' on what the price will be in the future, therefore, in a way, causing the future to statr happening earlier, theoretically smoothening the price fluctuations in the medium run. Again if the US unemployment rate is higher than expected, people expect the US economy to weaken, so should the US$. So right from today, the US$ loses value and from being worth 120JPY becomes worth 130JPY, then as the demand and supply for US$ and US goods and services plays through (US buying foreign goods rather than US goods of which less is produced) the US$ weakens say to 140JPY.

There also is destabilising speculation like the currency crisis in South East Asia a few years ago where pure speculative selling/panic selling drove the currencies way past their 'true value' causing a serious loss for the countries involved, a loss they are still recovering from, as their currencies slowly edge back upwards. Some people with a longer term view however are benefiting, tehy are those who bought these currencies at their lowest.

Sorry I changed your currencies, but I hope you get the general idea. Not all currency traders are parasites.

Answer 2

If they made a profit from the transaction you have described, it means that dollars went up in value since the original person obtained them.

That means, typically, that favorable investment opportunities in the United States have increased. There is more of a demand for dollars so the real exchange rate increases.

The profit does not come out of nowhere, it comes out of an increased expectation on the rate of return. The difference (profit) is what investors thought the return on a US investment would be 2 months ago vs what they think it will be today.

Answer 3

I'm no economists.. but this is how I understand it. Say you're in the United States, and you want a cheeseburger. You're not willing to pay 2.50 for your cheeseburger; however, you ARE willing to pay 2.00. A week later, you're in England, and you pay 2.00 for your cheeseburger that they're charging. You are visiting friends so you decide to stay awhile. The next time you visit McDonald's, the price has been raised to the equivalent to 2.50. The reason it could do this is because there is a higher demand for cheeseburgers for some reason. That means that the four dollars you're holding doesn't buy two cheeseburgers anymore. It only buys 1 with change to spare. But in America, you could still buy two. Somewhere this has to be made up--and that's where currency rates come in. That why if you brought your money back to US, you'd end up with more --because your dollar buys more. It is kind of vague, isn't it?

Answer 4

LOL,,,,,,
An analogy would be, you put money in the bank or buy a CD and your savings increase. Nothing was produced and so this is all magical mystery....
No, in reality that is how this works. When you buy a lottery you do not know whether you will win or lose. but you have your own beliefs.
When you are buying and selling currency you are infact working on your belief of how a currency will move depending on your forecast. When you lose money someone else gains, when you win money someone else loses. This is a zero sum game. Indeed nothing is produced or sold, but this is a mere "transfer of wealth" due to speculation in the currency market.

Answer 5

Somebody has to provide liquidity in any market, so that is the service currency traders provide. The currency traders assume a risk and hope to profit from assuming that risk. They don't always come out ahead-look at Nick Leeson.

Answer 6

How do you fake 80 5 human beings lack of life and 1400 human beings contracting it? it style of appears like a fairly massive deal, fairly on condition that previous outbreaks of the flu that look resembling this one have killed thousands and thousands. a lifeless ringer for the Spanish flu of 1918, this one is out of season and kills little ones. Now, I agree Napolitano is incompetent and could renounce, yet that doesn't mean she's mendacity about the flu.