How exactly are exchange rates determined?

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I was reading about how the exchange rates are fixed. I understand that demand and supply decide the exchange rate but how exactly is it done and by whom?

For example, consider US and India.
(https://www.quora.com/Where-and-how-are-exchange-rates-determined)

When it comes to any currency, say US dollars,
Demand for the currency exists due to the following reasons:

Import of goods and services from the USA

Direct purchases made in the USA by Indian tourists

Foreign investment by Indians in the USA

Speculative trading by Indians

Payment of international loans

Gifts and grants to the rest of the world

A currency(USD) is in supply due to the following reasons:

Export of Indian goods and services

Purchases by American tourists in India

FDI by Americans in India

Speculative trading by Americans in the Indian Rupee

Remittances from the USA

Depending on which of the factors outweighs the other factors, the exchange rate is determined.

Okay, but these are vague terms. Who decides "Purchases by American tourists in India", how can anyone keep track of these things, and how exactly are these factors decided? Is there a person sitting in an office somewhere who inputs some numbers in a formula and thus obtains the exchange rate?. I have a very limited understanding of economics so please bear with my noob question.

edited 23 hours ago

David Richerby

11115

asked yesterday

vikrant

21726

New contributor

21

I'm reminded of an (in)famous quote from shortly after the end of WWII. A delegation of economists from the USSR had been allowed to visit the UK to help understand how to rebuild the Russian economy. On arriving in London they had a meeting with senior UK government economists. One of the first questions the Russians asked was, "Who is responsible for controlling the price of bread in London?" (And they had great difficulty understanding that the correct answer was "nobody").
– alephzero
yesterday

13

@alephzero Actually, the correct answer is "everybody".
– Acccumulation
17 hours ago

1

@Nofel (In my layman understanding only!) the Soviet Union was a centrally planned communist economy. The government told the bakers how much money to sell bread for, and might've even told the bakers how much bread to make each day. In a more capitalist economy, the bakers can charge however much they want and the price eventually reaches an equilibrium due to constant adjustments - if they charge too much, nobody buys their bread, and if they charge too little, everyone wants their bread but they might not be able to bake it.
– not_a_comcast_employee
17 hours ago

3

If you're a baker, the ideal price you should charge is the highest price that still means you sell all your bread. (If it's too high, you won't sell all of it, if it's too low, then you'll sell out early and you could've got more money). If there's not enough bread being made, people will see the high prices and go "oh, I could make a lot of money if I was a baker!" and they'll become bakers and make more bread, lowering the price again. That's my very quick explanation to you of how non-centrally-planned pricing should work.
– not_a_comcast_employee
17 hours ago

1

The price of a currency at an exchange shop is simply set by the shop. No different from how WalMart sets the price of something. What do they base their price on? The actual market price of the currency. Note that the actual trading of, say, MSFT stock is on "the Nasdaq". The OP is simply asking "similar to how MSFT trades on 'the Nasdaq', where is it that currencies trade?" The answer is just the "InterbankMarket", which is a large international system (just like Nasdaq or Comex), which you don't hear about on the news much but is the trading platform for (massive amounts of) currencies.
– Fattie
15 hours ago

|
show 4 more comments

up vote
21
down vote

favorite

I was reading about how the exchange rates are fixed. I understand that demand and supply decide the exchange rate but how exactly is it done and by whom?

For example, consider US and India.
(https://www.quora.com/Where-and-how-are-exchange-rates-determined)

When it comes to any currency, say US dollars,
Demand for the currency exists due to the following reasons:

Import of goods and services from the USA

Direct purchases made in the USA by Indian tourists

Foreign investment by Indians in the USA

Speculative trading by Indians

Payment of international loans

Gifts and grants to the rest of the world

A currency(USD) is in supply due to the following reasons:

Export of Indian goods and services

Purchases by American tourists in India

FDI by Americans in India

Speculative trading by Americans in the Indian Rupee

Remittances from the USA

Depending on which of the factors outweighs the other factors, the exchange rate is determined.

edited 23 hours ago

David Richerby

11115

asked yesterday

vikrant

21726

New contributor

21

I'm reminded of an (in)famous quote from shortly after the end of WWII. A delegation of economists from the USSR had been allowed to visit the UK to help understand how to rebuild the Russian economy. On arriving in London they had a meeting with senior UK government economists. One of the first questions the Russians asked was, "Who is responsible for controlling the price of bread in London?" (And they had great difficulty understanding that the correct answer was "nobody").
– alephzero
yesterday

13

@alephzero Actually, the correct answer is "everybody".
– Acccumulation
17 hours ago

1

@Nofel (In my layman understanding only!) the Soviet Union was a centrally planned communist economy. The government told the bakers how much money to sell bread for, and might've even told the bakers how much bread to make each day. In a more capitalist economy, the bakers can charge however much they want and the price eventually reaches an equilibrium due to constant adjustments - if they charge too much, nobody buys their bread, and if they charge too little, everyone wants their bread but they might not be able to bake it.
– not_a_comcast_employee
17 hours ago

3

If you're a baker, the ideal price you should charge is the highest price that still means you sell all your bread. (If it's too high, you won't sell all of it, if it's too low, then you'll sell out early and you could've got more money). If there's not enough bread being made, people will see the high prices and go "oh, I could make a lot of money if I was a baker!" and they'll become bakers and make more bread, lowering the price again. That's my very quick explanation to you of how non-centrally-planned pricing should work.
– not_a_comcast_employee
17 hours ago

1

The price of a currency at an exchange shop is simply set by the shop. No different from how WalMart sets the price of something. What do they base their price on? The actual market price of the currency. Note that the actual trading of, say, MSFT stock is on "the Nasdaq". The OP is simply asking "similar to how MSFT trades on 'the Nasdaq', where is it that currencies trade?" The answer is just the "InterbankMarket", which is a large international system (just like Nasdaq or Comex), which you don't hear about on the news much but is the trading platform for (massive amounts of) currencies.
– Fattie
15 hours ago

|
show 4 more comments

up vote
21
down vote

favorite

I was reading about how the exchange rates are fixed. I understand that demand and supply decide the exchange rate but how exactly is it done and by whom?

For example, consider US and India.
(https://www.quora.com/Where-and-how-are-exchange-rates-determined)

When it comes to any currency, say US dollars,
Demand for the currency exists due to the following reasons:

Import of goods and services from the USA

Direct purchases made in the USA by Indian tourists

Foreign investment by Indians in the USA

Speculative trading by Indians

Payment of international loans

Gifts and grants to the rest of the world

A currency(USD) is in supply due to the following reasons:

Export of Indian goods and services

Purchases by American tourists in India

FDI by Americans in India

Speculative trading by Americans in the Indian Rupee

Remittances from the USA

Depending on which of the factors outweighs the other factors, the exchange rate is determined.

edited 23 hours ago

David Richerby

11115

asked yesterday

vikrant

21726

New contributor

I was reading about how the exchange rates are fixed. I understand that demand and supply decide the exchange rate but how exactly is it done and by whom?

For example, consider US and India.
(https://www.quora.com/Where-and-how-are-exchange-rates-determined)

When it comes to any currency, say US dollars,
Demand for the currency exists due to the following reasons:

Import of goods and services from the USA

Direct purchases made in the USA by Indian tourists

Foreign investment by Indians in the USA

Speculative trading by Indians

Payment of international loans

Gifts and grants to the rest of the world

A currency(USD) is in supply due to the following reasons:

Export of Indian goods and services

Purchases by American tourists in India

FDI by Americans in India

Speculative trading by Americans in the Indian Rupee

Remittances from the USA

Depending on which of the factors outweighs the other factors, the exchange rate is determined.

foreign-exchange currency

edited 23 hours ago

David Richerby

11115

asked yesterday

vikrant

21726

New contributor

edited 23 hours ago

David Richerby

11115

asked yesterday

vikrant

21726

New contributor

edited 23 hours ago

David Richerby

11115

edited 23 hours ago

David Richerby

11115

edited 23 hours ago

David Richerby

11115

asked yesterday

vikrant

21726

New contributor

asked yesterday

vikrant

21726

asked yesterday

vikrant

21726

New contributor

vikrant is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.

21

I'm reminded of an (in)famous quote from shortly after the end of WWII. A delegation of economists from the USSR had been allowed to visit the UK to help understand how to rebuild the Russian economy. On arriving in London they had a meeting with senior UK government economists. One of the first questions the Russians asked was, "Who is responsible for controlling the price of bread in London?" (And they had great difficulty understanding that the correct answer was "nobody").
– alephzero
yesterday

13

@alephzero Actually, the correct answer is "everybody".
– Acccumulation
17 hours ago

1

@Nofel (In my layman understanding only!) the Soviet Union was a centrally planned communist economy. The government told the bakers how much money to sell bread for, and might've even told the bakers how much bread to make each day. In a more capitalist economy, the bakers can charge however much they want and the price eventually reaches an equilibrium due to constant adjustments - if they charge too much, nobody buys their bread, and if they charge too little, everyone wants their bread but they might not be able to bake it.
– not_a_comcast_employee
17 hours ago

3

If you're a baker, the ideal price you should charge is the highest price that still means you sell all your bread. (If it's too high, you won't sell all of it, if it's too low, then you'll sell out early and you could've got more money). If there's not enough bread being made, people will see the high prices and go "oh, I could make a lot of money if I was a baker!" and they'll become bakers and make more bread, lowering the price again. That's my very quick explanation to you of how non-centrally-planned pricing should work.
– not_a_comcast_employee
17 hours ago

1

The price of a currency at an exchange shop is simply set by the shop. No different from how WalMart sets the price of something. What do they base their price on? The actual market price of the currency. Note that the actual trading of, say, MSFT stock is on "the Nasdaq". The OP is simply asking "similar to how MSFT trades on 'the Nasdaq', where is it that currencies trade?" The answer is just the "InterbankMarket", which is a large international system (just like Nasdaq or Comex), which you don't hear about on the news much but is the trading platform for (massive amounts of) currencies.
– Fattie
15 hours ago

|
show 4 more comments

21

I'm reminded of an (in)famous quote from shortly after the end of WWII. A delegation of economists from the USSR had been allowed to visit the UK to help understand how to rebuild the Russian economy. On arriving in London they had a meeting with senior UK government economists. One of the first questions the Russians asked was, "Who is responsible for controlling the price of bread in London?" (And they had great difficulty understanding that the correct answer was "nobody").
– alephzero
yesterday

13

@alephzero Actually, the correct answer is "everybody".
– Acccumulation
17 hours ago

1

@Nofel (In my layman understanding only!) the Soviet Union was a centrally planned communist economy. The government told the bakers how much money to sell bread for, and might've even told the bakers how much bread to make each day. In a more capitalist economy, the bakers can charge however much they want and the price eventually reaches an equilibrium due to constant adjustments - if they charge too much, nobody buys their bread, and if they charge too little, everyone wants their bread but they might not be able to bake it.
– not_a_comcast_employee
17 hours ago

3

If you're a baker, the ideal price you should charge is the highest price that still means you sell all your bread. (If it's too high, you won't sell all of it, if it's too low, then you'll sell out early and you could've got more money). If there's not enough bread being made, people will see the high prices and go "oh, I could make a lot of money if I was a baker!" and they'll become bakers and make more bread, lowering the price again. That's my very quick explanation to you of how non-centrally-planned pricing should work.
– not_a_comcast_employee
17 hours ago

1

The price of a currency at an exchange shop is simply set by the shop. No different from how WalMart sets the price of something. What do they base their price on? The actual market price of the currency. Note that the actual trading of, say, MSFT stock is on "the Nasdaq". The OP is simply asking "similar to how MSFT trades on 'the Nasdaq', where is it that currencies trade?" The answer is just the "InterbankMarket", which is a large international system (just like Nasdaq or Comex), which you don't hear about on the news much but is the trading platform for (massive amounts of) currencies.
– Fattie
15 hours ago

I'm reminded of an (in)famous quote from shortly after the end of WWII. A delegation of economists from the USSR had been allowed to visit the UK to help understand how to rebuild the Russian economy. On arriving in London they had a meeting with senior UK government economists. One of the first questions the Russians asked was, "Who is responsible for controlling the price of bread in London?" (And they had great difficulty understanding that the correct answer was "nobody").
– alephzero
yesterday

@alephzero Actually, the correct answer is "everybody".
– Acccumulation
17 hours ago

@Nofel (In my layman understanding only!) the Soviet Union was a centrally planned communist economy. The government told the bakers how much money to sell bread for, and might've even told the bakers how much bread to make each day. In a more capitalist economy, the bakers can charge however much they want and the price eventually reaches an equilibrium due to constant adjustments - if they charge too much, nobody buys their bread, and if they charge too little, everyone wants their bread but they might not be able to bake it.
– not_a_comcast_employee
17 hours ago

If you're a baker, the ideal price you should charge is the highest price that still means you sell all your bread. (If it's too high, you won't sell all of it, if it's too low, then you'll sell out early and you could've got more money). If there's not enough bread being made, people will see the high prices and go "oh, I could make a lot of money if I was a baker!" and they'll become bakers and make more bread, lowering the price again. That's my very quick explanation to you of how non-centrally-planned pricing should work.
– not_a_comcast_employee
17 hours ago

The price of a currency at an exchange shop is simply set by the shop. No different from how WalMart sets the price of something. What do they base their price on? The actual market price of the currency. Note that the actual trading of, say, MSFT stock is on "the Nasdaq". The OP is simply asking "similar to how MSFT trades on 'the Nasdaq', where is it that currencies trade?" The answer is just the "InterbankMarket", which is a large international system (just like Nasdaq or Comex), which you don't hear about on the news much but is the trading platform for (massive amounts of) currencies.
– Fattie
15 hours ago

|
show 4 more comments

3 Answers
3

active

oldest

votes

up vote
22
down vote

accepted

Currencies are indeed "actually" traded basically on what is called the "Interbank Market"

Here's a quick read on that:

https://en.wikipedia.org/wiki/Foreign_exchange_market

Let us compare and contrast!

Stocks (like AAPL) are traded on the two or three huge "stock exchanges" such as "Nasdaq".

Commodities like gold and oil are traded on the two or three huge "commodities exchanges", such as "Nymex", "CME", etc.

And to your question, currencies generally are traded on the huge "Interbank Market" (as nicely described in that article).

This is a (fairly!) free market. The price is determined exactly, each second, by buyers and sellers.

That is the only "real" price of a currency.

Just as Nasdaq continually reports the "actual" price of AAPL to the internet, and Nymex continually reports the "actual" price of gold and oil to the internet, the Interbank Market continually reports the "actual" price of EUR, AUD, etc to the internet.

When you go to a local exchanger at the airport, they simply use that current rate, i.e. ultimately from the "Interbank Market" system.

Your question is astute...

When "you or I" change some money, the money changer retail shop on the street is not "trading", it's not a situation where two parties offer bids/asks. The shop simply offers a fixed price to buy or sell different currencies, and that fixed price is simply based on the current price seen on the "actual" market. (Exactly the same thing happen when you buy some ounces of gold from a retail gold dealer.)

To make a contrasting example - when you buy a house from some person, it's an actual trade with bids/asks by the parties involved, which will settle at some price. And when you buy stocks (even 1 share) it's more or less an actual bids/asks situation.

Just to reiterate, this wiki article https://en.wikipedia.org/wiki/Foreign_exchange_market pretty much fully explains the interbank market. Which is indeed the worldwide currency "exchange" - which is analogous to the Nasdaq "exchange" for stocks or Nymex "exchange" for gold and oil.

edited 15 hours ago

answered yesterday

Fattie

3,40421632

" they literally just glance at the internet." actually i want to know who puts that rate on the internet in the first place? and how does he decides that rate?
– vikrant
yesterday

I tried to sober up and clarify, @vikrant ! :)
– Fattie
yesterday

thanks for the link, this really explains everything in detail, although i have to admit if i would have directly gone to the Wikipedia article i wouldn't have understood anything, but after reading the answers here i got a good foundation, and i am able to really understand the article. :)
– vikrant
yesterday

Fantastic! Score one for Chenin Blanc !
– Fattie
yesterday

I hesitated to nitpick, because I think this completely answers the OP’s question. However, I wanted to clear a couple things up. There are currently 13 US stock exchanges. Also, oil futures do trade on Nymex, but gold futures are on comex, both of which are now operated by cme group. Spot gold and oil trade otc, and in fact gold trades in essentially the same market as fx. More seriously, I think that when one changes money at a retail shop, it typically is a bid/ask situation. They have a price at which thy will buy forex and a price at which they will sell.
– Callus
23 hours ago

|
show 5 more comments

up vote
9
down vote

No one applies the factors to calculate an exchange rate (for freely floating currencies) — it’s not calculated at all, but determined from what actually happens in the market. People who want to buy currency A with currency B bid on how much of currency B they are prepared to give in order to get currency A. Similarly, people who want to buy currency B with currency A also bid. When the bids match up, a transaction happens, and that is the exchange rate, until the next transaction. Since in practice the rate won’t vary very much from minute to minute for actively traded currencies, places that exchange small amounts of cash for consumers will set a rate for the day rather than checking the current rate every time they do a transaction.

answered yesterday

Mike Scott

12.9k3546

"places that exchange small amounts of cash for consumers" , they are the banks? and how do they find out the exchange rate. i understand the process of bidding you explained, but if these places are setting the exchange rates in advance, how do they determine it even before the bidding has started?
– vikrant
yesterday

2

My answer explains how it’s set. It’s the price of the last transaction on the actual currency markets, which do not include transactions between you and your friend, your local bank or a bureau de change. Small places like that just take the overnight rate from the actual markets and use it as their exchange rate for the day.
– Mike Scott
yesterday

1

@vikrant It doesn’t need a central authority to keep the price the same across all markets, arbitrageurs do that. If one market has a lower price for dollars than another, then they instantly buy dollars in the cheaper market and sell them in the more expensive one. That keeps the prices the same.
– Mike Scott
yesterday

1

Deutsche Bank is offering 20 billion euros for 18 billion pounds, Barclay's is offering 20 billion euros for 17 billion pounds, Lloyd's can't find a better deal so they accept Barclay's offer and that's now the exchange rate. People actually care about that exchange rate since it's a lot of money.
– not_a_comcast_employee
17 hours ago

1

@vikrant To make a very crude analogy, asking how a country determines its exchange rate would be like asking how the club determines how hot you have to be to go home with someone. And the answer is that they don't. It's determined by all the interactions between all the people involved, averaging out to some sort of equilibrium price (or level of attractiveness).
– not_a_comcast_employee
17 hours ago

|
show 9 more comments

up vote
7
down vote

Here's a very simple way to determine the exchange rate between dollars and euros, assuming you have a few dollars:

Go from place to place and ask them how many euros they'll give you for your dollars. Accept the best offer you get.

Go from place to place and ask people how many dollars they'll give you for your euros. Accept the best offer you get.

If you made a profit, go back to step 1.

Average the two exchange rates you got the last time you executed steps 1 and 2.

This is the exchange rate between dollars and euros.

As there are markets that permit people to offer and accept trades between currencies all over the world, this process is constantly going on in large amounts in numerous places with every currency known to man. Currencies worth a total of approximately $5 trillion per day are traded in this way. From this stream of trades, the exchange rates can readily be determined.

All of the factors listed in the question affect what trades people are willing to make. But the rate is determined from the trades people actually make. The same is true with the price of a car. The cost of steel and the cost of labor go into the price of a car. But when you want to know the price of a car, what you want to know is what price people are actually buying and selling cars for, and you determine this by looking at car sales.

edited 21 hours ago

answered 21 hours ago

David Schwartz

4,4591521

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3 Answers
3

active

oldest

votes

3 Answers
3

active

oldest

votes

up vote
22
down vote

accepted

Currencies are indeed "actually" traded basically on what is called the "Interbank Market"

Here's a quick read on that:

https://en.wikipedia.org/wiki/Foreign_exchange_market

Let us compare and contrast!

Stocks (like AAPL) are traded on the two or three huge "stock exchanges" such as "Nasdaq".

Commodities like gold and oil are traded on the two or three huge "commodities exchanges", such as "Nymex", "CME", etc.

And to your question, currencies generally are traded on the huge "Interbank Market" (as nicely described in that article).

This is a (fairly!) free market. The price is determined exactly, each second, by buyers and sellers.

That is the only "real" price of a currency.

When you go to a local exchanger at the airport, they simply use that current rate, i.e. ultimately from the "Interbank Market" system.

Your question is astute...

edited 15 hours ago

answered yesterday

Fattie

3,40421632

" they literally just glance at the internet." actually i want to know who puts that rate on the internet in the first place? and how does he decides that rate?
– vikrant
yesterday

I tried to sober up and clarify, @vikrant ! :)
– Fattie
yesterday

thanks for the link, this really explains everything in detail, although i have to admit if i would have directly gone to the Wikipedia article i wouldn't have understood anything, but after reading the answers here i got a good foundation, and i am able to really understand the article. :)
– vikrant
yesterday

Fantastic! Score one for Chenin Blanc !
– Fattie
yesterday

I hesitated to nitpick, because I think this completely answers the OP’s question. However, I wanted to clear a couple things up. There are currently 13 US stock exchanges. Also, oil futures do trade on Nymex, but gold futures are on comex, both of which are now operated by cme group. Spot gold and oil trade otc, and in fact gold trades in essentially the same market as fx. More seriously, I think that when one changes money at a retail shop, it typically is a bid/ask situation. They have a price at which thy will buy forex and a price at which they will sell.
– Callus
23 hours ago

|
show 5 more comments

up vote
22
down vote

accepted

Currencies are indeed "actually" traded basically on what is called the "Interbank Market"

Here's a quick read on that:

https://en.wikipedia.org/wiki/Foreign_exchange_market

Let us compare and contrast!

Stocks (like AAPL) are traded on the two or three huge "stock exchanges" such as "Nasdaq".

Commodities like gold and oil are traded on the two or three huge "commodities exchanges", such as "Nymex", "CME", etc.

And to your question, currencies generally are traded on the huge "Interbank Market" (as nicely described in that article).

This is a (fairly!) free market. The price is determined exactly, each second, by buyers and sellers.

That is the only "real" price of a currency.

When you go to a local exchanger at the airport, they simply use that current rate, i.e. ultimately from the "Interbank Market" system.

Your question is astute...

edited 15 hours ago

answered yesterday

Fattie

3,40421632

" they literally just glance at the internet." actually i want to know who puts that rate on the internet in the first place? and how does he decides that rate?
– vikrant
yesterday

I tried to sober up and clarify, @vikrant ! :)
– Fattie
yesterday

thanks for the link, this really explains everything in detail, although i have to admit if i would have directly gone to the Wikipedia article i wouldn't have understood anything, but after reading the answers here i got a good foundation, and i am able to really understand the article. :)
– vikrant
yesterday

Fantastic! Score one for Chenin Blanc !
– Fattie
yesterday

I hesitated to nitpick, because I think this completely answers the OP’s question. However, I wanted to clear a couple things up. There are currently 13 US stock exchanges. Also, oil futures do trade on Nymex, but gold futures are on comex, both of which are now operated by cme group. Spot gold and oil trade otc, and in fact gold trades in essentially the same market as fx. More seriously, I think that when one changes money at a retail shop, it typically is a bid/ask situation. They have a price at which thy will buy forex and a price at which they will sell.
– Callus
23 hours ago

|
show 5 more comments

up vote
22
down vote

accepted

Currencies are indeed "actually" traded basically on what is called the "Interbank Market"

Here's a quick read on that:

https://en.wikipedia.org/wiki/Foreign_exchange_market

Let us compare and contrast!

Stocks (like AAPL) are traded on the two or three huge "stock exchanges" such as "Nasdaq".

Commodities like gold and oil are traded on the two or three huge "commodities exchanges", such as "Nymex", "CME", etc.

And to your question, currencies generally are traded on the huge "Interbank Market" (as nicely described in that article).

This is a (fairly!) free market. The price is determined exactly, each second, by buyers and sellers.

That is the only "real" price of a currency.

When you go to a local exchanger at the airport, they simply use that current rate, i.e. ultimately from the "Interbank Market" system.

Your question is astute...

edited 15 hours ago

answered yesterday

Fattie

3,40421632

Currencies are indeed "actually" traded basically on what is called the "Interbank Market"

Here's a quick read on that:

https://en.wikipedia.org/wiki/Foreign_exchange_market

Let us compare and contrast!

Stocks (like AAPL) are traded on the two or three huge "stock exchanges" such as "Nasdaq".

Commodities like gold and oil are traded on the two or three huge "commodities exchanges", such as "Nymex", "CME", etc.

And to your question, currencies generally are traded on the huge "Interbank Market" (as nicely described in that article).

This is a (fairly!) free market. The price is determined exactly, each second, by buyers and sellers.

That is the only "real" price of a currency.

When you go to a local exchanger at the airport, they simply use that current rate, i.e. ultimately from the "Interbank Market" system.

Your question is astute...

edited 15 hours ago

answered yesterday

Fattie

3,40421632

edited 15 hours ago

answered yesterday

Fattie

3,40421632

answered yesterday

Fattie

3,40421632

answered yesterday

Fattie

3,40421632

" they literally just glance at the internet." actually i want to know who puts that rate on the internet in the first place? and how does he decides that rate?
– vikrant
yesterday

I tried to sober up and clarify, @vikrant ! :)
– Fattie
yesterday

thanks for the link, this really explains everything in detail, although i have to admit if i would have directly gone to the Wikipedia article i wouldn't have understood anything, but after reading the answers here i got a good foundation, and i am able to really understand the article. :)
– vikrant
yesterday

Fantastic! Score one for Chenin Blanc !
– Fattie
yesterday

I hesitated to nitpick, because I think this completely answers the OP’s question. However, I wanted to clear a couple things up. There are currently 13 US stock exchanges. Also, oil futures do trade on Nymex, but gold futures are on comex, both of which are now operated by cme group. Spot gold and oil trade otc, and in fact gold trades in essentially the same market as fx. More seriously, I think that when one changes money at a retail shop, it typically is a bid/ask situation. They have a price at which thy will buy forex and a price at which they will sell.
– Callus
23 hours ago

|
show 5 more comments

" they literally just glance at the internet." actually i want to know who puts that rate on the internet in the first place? and how does he decides that rate?
– vikrant
yesterday

I tried to sober up and clarify, @vikrant ! :)
– Fattie
yesterday

thanks for the link, this really explains everything in detail, although i have to admit if i would have directly gone to the Wikipedia article i wouldn't have understood anything, but after reading the answers here i got a good foundation, and i am able to really understand the article. :)
– vikrant
yesterday

Fantastic! Score one for Chenin Blanc !
– Fattie
yesterday

I hesitated to nitpick, because I think this completely answers the OP’s question. However, I wanted to clear a couple things up. There are currently 13 US stock exchanges. Also, oil futures do trade on Nymex, but gold futures are on comex, both of which are now operated by cme group. Spot gold and oil trade otc, and in fact gold trades in essentially the same market as fx. More seriously, I think that when one changes money at a retail shop, it typically is a bid/ask situation. They have a price at which thy will buy forex and a price at which they will sell.
– Callus
23 hours ago

" they literally just glance at the internet." actually i want to know who puts that rate on the internet in the first place? and how does he decides that rate?
– vikrant
yesterday

I tried to sober up and clarify, @vikrant ! :)
– Fattie
yesterday

thanks for the link, this really explains everything in detail, although i have to admit if i would have directly gone to the Wikipedia article i wouldn't have understood anything, but after reading the answers here i got a good foundation, and i am able to really understand the article. :)
– vikrant
yesterday

Fantastic! Score one for Chenin Blanc !
– Fattie
yesterday

I hesitated to nitpick, because I think this completely answers the OP’s question. However, I wanted to clear a couple things up. There are currently 13 US stock exchanges. Also, oil futures do trade on Nymex, but gold futures are on comex, both of which are now operated by cme group. Spot gold and oil trade otc, and in fact gold trades in essentially the same market as fx. More seriously, I think that when one changes money at a retail shop, it typically is a bid/ask situation. They have a price at which thy will buy forex and a price at which they will sell.
– Callus
23 hours ago

|
show 5 more comments

up vote
9
down vote

answered yesterday

Mike Scott

12.9k3546

"places that exchange small amounts of cash for consumers" , they are the banks? and how do they find out the exchange rate. i understand the process of bidding you explained, but if these places are setting the exchange rates in advance, how do they determine it even before the bidding has started?
– vikrant
yesterday

2

My answer explains how it’s set. It’s the price of the last transaction on the actual currency markets, which do not include transactions between you and your friend, your local bank or a bureau de change. Small places like that just take the overnight rate from the actual markets and use it as their exchange rate for the day.
– Mike Scott
yesterday

1

@vikrant It doesn’t need a central authority to keep the price the same across all markets, arbitrageurs do that. If one market has a lower price for dollars than another, then they instantly buy dollars in the cheaper market and sell them in the more expensive one. That keeps the prices the same.
– Mike Scott
yesterday

1

Deutsche Bank is offering 20 billion euros for 18 billion pounds, Barclay's is offering 20 billion euros for 17 billion pounds, Lloyd's can't find a better deal so they accept Barclay's offer and that's now the exchange rate. People actually care about that exchange rate since it's a lot of money.
– not_a_comcast_employee
17 hours ago

1

@vikrant To make a very crude analogy, asking how a country determines its exchange rate would be like asking how the club determines how hot you have to be to go home with someone. And the answer is that they don't. It's determined by all the interactions between all the people involved, averaging out to some sort of equilibrium price (or level of attractiveness).
– not_a_comcast_employee
17 hours ago

|
show 9 more comments

up vote
9
down vote

answered yesterday

Mike Scott

12.9k3546

"places that exchange small amounts of cash for consumers" , they are the banks? and how do they find out the exchange rate. i understand the process of bidding you explained, but if these places are setting the exchange rates in advance, how do they determine it even before the bidding has started?
– vikrant
yesterday

2

My answer explains how it’s set. It’s the price of the last transaction on the actual currency markets, which do not include transactions between you and your friend, your local bank or a bureau de change. Small places like that just take the overnight rate from the actual markets and use it as their exchange rate for the day.
– Mike Scott
yesterday

1

@vikrant It doesn’t need a central authority to keep the price the same across all markets, arbitrageurs do that. If one market has a lower price for dollars than another, then they instantly buy dollars in the cheaper market and sell them in the more expensive one. That keeps the prices the same.
– Mike Scott
yesterday

1

Deutsche Bank is offering 20 billion euros for 18 billion pounds, Barclay's is offering 20 billion euros for 17 billion pounds, Lloyd's can't find a better deal so they accept Barclay's offer and that's now the exchange rate. People actually care about that exchange rate since it's a lot of money.
– not_a_comcast_employee
17 hours ago

1

@vikrant To make a very crude analogy, asking how a country determines its exchange rate would be like asking how the club determines how hot you have to be to go home with someone. And the answer is that they don't. It's determined by all the interactions between all the people involved, averaging out to some sort of equilibrium price (or level of attractiveness).
– not_a_comcast_employee
17 hours ago

|
show 9 more comments

up vote
9
down vote

answered yesterday

Mike Scott

12.9k3546

answered yesterday

Mike Scott

12.9k3546

answered yesterday

Mike Scott

12.9k3546

answered yesterday

Mike Scott

12.9k3546

answered yesterday

Mike Scott

12.9k3546

"places that exchange small amounts of cash for consumers" , they are the banks? and how do they find out the exchange rate. i understand the process of bidding you explained, but if these places are setting the exchange rates in advance, how do they determine it even before the bidding has started?
– vikrant
yesterday

2

My answer explains how it’s set. It’s the price of the last transaction on the actual currency markets, which do not include transactions between you and your friend, your local bank or a bureau de change. Small places like that just take the overnight rate from the actual markets and use it as their exchange rate for the day.
– Mike Scott
yesterday

1

@vikrant It doesn’t need a central authority to keep the price the same across all markets, arbitrageurs do that. If one market has a lower price for dollars than another, then they instantly buy dollars in the cheaper market and sell them in the more expensive one. That keeps the prices the same.
– Mike Scott
yesterday

1

Deutsche Bank is offering 20 billion euros for 18 billion pounds, Barclay's is offering 20 billion euros for 17 billion pounds, Lloyd's can't find a better deal so they accept Barclay's offer and that's now the exchange rate. People actually care about that exchange rate since it's a lot of money.
– not_a_comcast_employee
17 hours ago

1

@vikrant To make a very crude analogy, asking how a country determines its exchange rate would be like asking how the club determines how hot you have to be to go home with someone. And the answer is that they don't. It's determined by all the interactions between all the people involved, averaging out to some sort of equilibrium price (or level of attractiveness).
– not_a_comcast_employee
17 hours ago

|
show 9 more comments

"places that exchange small amounts of cash for consumers" , they are the banks? and how do they find out the exchange rate. i understand the process of bidding you explained, but if these places are setting the exchange rates in advance, how do they determine it even before the bidding has started?
– vikrant
yesterday

2

My answer explains how it’s set. It’s the price of the last transaction on the actual currency markets, which do not include transactions between you and your friend, your local bank or a bureau de change. Small places like that just take the overnight rate from the actual markets and use it as their exchange rate for the day.
– Mike Scott
yesterday

1

@vikrant It doesn’t need a central authority to keep the price the same across all markets, arbitrageurs do that. If one market has a lower price for dollars than another, then they instantly buy dollars in the cheaper market and sell them in the more expensive one. That keeps the prices the same.
– Mike Scott
yesterday

1

Deutsche Bank is offering 20 billion euros for 18 billion pounds, Barclay's is offering 20 billion euros for 17 billion pounds, Lloyd's can't find a better deal so they accept Barclay's offer and that's now the exchange rate. People actually care about that exchange rate since it's a lot of money.
– not_a_comcast_employee
17 hours ago

1

@vikrant To make a very crude analogy, asking how a country determines its exchange rate would be like asking how the club determines how hot you have to be to go home with someone. And the answer is that they don't. It's determined by all the interactions between all the people involved, averaging out to some sort of equilibrium price (or level of attractiveness).
– not_a_comcast_employee
17 hours ago

"places that exchange small amounts of cash for consumers" , they are the banks? and how do they find out the exchange rate. i understand the process of bidding you explained, but if these places are setting the exchange rates in advance, how do they determine it even before the bidding has started?
– vikrant
yesterday

My answer explains how it’s set. It’s the price of the last transaction on the actual currency markets, which do not include transactions between you and your friend, your local bank or a bureau de change. Small places like that just take the overnight rate from the actual markets and use it as their exchange rate for the day.
– Mike Scott
yesterday

@vikrant It doesn’t need a central authority to keep the price the same across all markets, arbitrageurs do that. If one market has a lower price for dollars than another, then they instantly buy dollars in the cheaper market and sell them in the more expensive one. That keeps the prices the same.
– Mike Scott
yesterday

Deutsche Bank is offering 20 billion euros for 18 billion pounds, Barclay's is offering 20 billion euros for 17 billion pounds, Lloyd's can't find a better deal so they accept Barclay's offer and that's now the exchange rate. People actually care about that exchange rate since it's a lot of money.
– not_a_comcast_employee
17 hours ago

@vikrant To make a very crude analogy, asking how a country determines its exchange rate would be like asking how the club determines how hot you have to be to go home with someone. And the answer is that they don't. It's determined by all the interactions between all the people involved, averaging out to some sort of equilibrium price (or level of attractiveness).
– not_a_comcast_employee
17 hours ago

|
show 9 more comments

up vote
7
down vote

Here's a very simple way to determine the exchange rate between dollars and euros, assuming you have a few dollars:

Go from place to place and ask them how many euros they'll give you for your dollars. Accept the best offer you get.

Go from place to place and ask people how many dollars they'll give you for your euros. Accept the best offer you get.

If you made a profit, go back to step 1.

Average the two exchange rates you got the last time you executed steps 1 and 2.

This is the exchange rate between dollars and euros.

edited 21 hours ago

answered 21 hours ago

David Schwartz

4,4591521

add a comment |

up vote
7
down vote

Here's a very simple way to determine the exchange rate between dollars and euros, assuming you have a few dollars:

Go from place to place and ask them how many euros they'll give you for your dollars. Accept the best offer you get.

Go from place to place and ask people how many dollars they'll give you for your euros. Accept the best offer you get.

If you made a profit, go back to step 1.

Average the two exchange rates you got the last time you executed steps 1 and 2.

This is the exchange rate between dollars and euros.

edited 21 hours ago

answered 21 hours ago

David Schwartz

4,4591521

add a comment |

up vote
7
down vote

Here's a very simple way to determine the exchange rate between dollars and euros, assuming you have a few dollars:

Go from place to place and ask them how many euros they'll give you for your dollars. Accept the best offer you get.

Go from place to place and ask people how many dollars they'll give you for your euros. Accept the best offer you get.

If you made a profit, go back to step 1.

Average the two exchange rates you got the last time you executed steps 1 and 2.

This is the exchange rate between dollars and euros.

edited 21 hours ago

answered 21 hours ago

David Schwartz

4,4591521

Here's a very simple way to determine the exchange rate between dollars and euros, assuming you have a few dollars:

Go from place to place and ask them how many euros they'll give you for your dollars. Accept the best offer you get.

Go from place to place and ask people how many dollars they'll give you for your euros. Accept the best offer you get.

If you made a profit, go back to step 1.

Average the two exchange rates you got the last time you executed steps 1 and 2.

This is the exchange rate between dollars and euros.

edited 21 hours ago

answered 21 hours ago

David Schwartz

4,4591521

edited 21 hours ago

answered 21 hours ago

David Schwartz

4,4591521

answered 21 hours ago

David Schwartz

4,4591521

answered 21 hours ago

David Schwartz

4,4591521

add a comment |

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