Forex Arbitrage

Finance allah shmoop how does foreign exchange work All right

Well there's risk when you buy and sell goods and

services outside of the u s that isn't there when

you buy and sell goods inside the u s your

smoothies and absence a major chain of a thousand smoothie

shops you buy a million bananas a year the customers

believe that they have a peel you buy all of

them plantains actually these little guys from uganda and just

agreed to pay in ugandan shillings One u s dollar

buys about four thousand ugandan shillings and that's a lot

of bananas You take the risk on the foreign exchange

currency because well you don't like hedging your bets you're

just going to take the risk if the currency moves

up or down it's on you horse at another way

Yeah if you were nervous about relative currency valuation fluctuations

well you could be a kind of currency life insurance

in paying a ten or twenty percent premium above where

the relative currencies air trading today that for thousands of

one thing and you could sleep pretty well at night

knowing that your rates were fixed like you're basically paying

Someone else to take the risk of uganda suddenly getting

its financial act together in its currency skyrocketing so that

a u s dollars only buys you three thousand or

two thousand ugandan shillings or things go the other way

But you don't like buying insurance You know how nice

the jets are that insurance executives fly and you know

about warren buffett He didn't get there for free so

you didn't had you didn't do anything to worry about

currency but then all of a sudden china decides to

adopt uganda as its new financial partner agreeing toe underwrite

all of uganda's debts basically in return for well uganda

Yeah they liked owning uganda way better weather and they

also got the highly prized you r l uganda dot

com So then almost literally overnight the ugandan shilling becomes

highly more valued under the deeply respected and feared auspices

of the chinese banking system So instead of a dollar

buying you for thousand schillings while now a u s

dollar only buys you one thousand so your cost of

bananas just went from four hundred bucks a ton to

sixteen hundred bucks and the marginal cost of those banana

Plantain Things in your shakes went from thirty cents over

a dollar twenty and with profit margin per shake it

only two fifty to start with twelve new profit margins

suddenly dropped almost in half Eventually you'll have to find

another banana supplier or raise prices or figure out a

substitute But well for now it looks like this Foreign 00:02:29.253 --> [endTime] exchange deals Profits will get eating