Currency Exchange Explained In A Few Words Ok, so there’s plenty of confusion on currency exchange and many don’t understand how it works. In this short article I plan to explain how currency exchange works and how it affects the market. For beginners we will start with a very simpl simple model. For this model we will use the American dollar $ and Chinese Yuan ¥ (renminbi). Let’s just say (just to make things simple) 10 Chinese Yuan = 1 US dollar and we have three individuals who are active in this market (in reality the market is way biggerr then that). We have person “A”, person “B”” and person “C”. Person “A” has 1,000 Yuan; person “B”” has $100 and so does person “C”
VS. So now let’s say person “A” who has 1,000 Yuan wants to convert to dollar and person “B” and “C” who have 100 dollars want to convert to Yuan. • •
$200 need to be converted to Yuan (2,000) ¥ 1,000 Yuan need to o be converted to dollar
Uh-Oh! Seems like there’s a shortage of Yuan! Now anyone with basic business and marketing skills will know that as supply goes down, demand goes up ( ¥ + $ - ) Ok so let me make it a bit more clear… person “A” who has the Yuan (the currency with more demand) decides to sell 100 Yuan for the exchange rate we started with (10 Yuan = 1 dollar) to person “B” 1. 2. 3. 4. 5. 6. 7.
Person “A” offers 100 Yuan for $10 Person “B” accepts offer and pays $10 for 100 Yuan Person “C” is still left with $100 he must convert to Yuan Less Yuan available (because of first transaction) making the demand for it higher Person “A” takes advantage of demand and offers to sell 90 Yuan for $10 Person “C” accepts offer = NEW QUOTED RATE Price of $ goes down price of ¥ goes up
By Eliron Hanan www.knowledgesanctuary.com