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Ranch Hand
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OK people, who can explain this:
There are two countries, say England and France.
Given Fact 1:
If you go in England, 1 Pound == 0.9 Francs and if you go to France, 1 Franc == 0.9 Pounds.
Given Fact 2:
A candy costs 0.1P and 0.1F in Eng. and Fr. respectively.
Scenerio:
Our man, John, has 1 Pound. He goes to England and exchanges it for 1 Franc and a candy. Now, he goes to France; exchanges the Frank that he just got from England with 1 Pound and a candy. After 10 such trips, he exchanges 10 candies with a Pound ( or a Franc if he's in France).
And that's what he keeps doing all the time!!! Cool eh
Question:
How long can this go on? Indefinitely? What, if any, is the problem with the system?
 
Ranch Hand
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What, if any, is the problem with the system?


He's not actually making any money - unless he owns a candy store and he's reselling all of the candy he's bought
 
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I'm sure the price of the candy will change eventually
 
Jim Bertorelli
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Well, take candy out of the equation. Let's say he exchanges 1P for 1F + 0.1P and 1F for 1P+ 0.1F
 
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And just how much did he lose in transportation and lodging costs?
 
Wanderer
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Transportation and lodging need not be a significant issue if the transactions are done in sufficient volume to offset these costs. Quite possibly John can make transfers electronically - maybe with the help of a partner, so each person can stay in one country most of the time.
The given currency exchange rates show that banks in England consider francs to be more valuable than pounds - to them at least - while banks in France believe the reverse is true - agin, for them at least. With each round trip made by John, a bank in England takes in francs and loses pounds, while a bank in France takes in pounds and loses francs. Over time, the banks will note that they are acquiring a surplus of the currency that they consider more valuable, while running low on the one they consider less valuable. At some point they will need to adjust their rates, in order to avoid running out of one currency. Once that happens, John will no longer be able to profit from these trips.
[This message has been edited by Jim Yingst (edited December 07, 2001).]
 
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Moral of the story : Dont accept candy from strangers ?
 
High Plains Drifter
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More likely moral: Don't accept pounds/francs from strangers.
Out-of-the-box point: if arbitrage was that easy, we'd have more than a few busted banks every week.
 
mister krabs
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That's why all money exchanges are based on the US dollar.
 
Jim Bertorelli
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Your explanation is very close, Jim.


The given currency exchange rates show that banks in England consider francs to be more valuable than pounds - to them at least - while banks in France believe the reverse is true - agin, for them at least.


Just the opposite is correct. Observe again, In England 1P == 1F +.1P. I.e., 1F = 1P -.1P or .9P (in England that is)
The point is this system will go on only till England depletes its Francs and France depletes its Pounds.
The profit our man is making, is due to somebody else's efforts that transfered Pounds to France and Francs to to England in the first place.
This is equivalent of another real life scenerio of water flowing downstream. In the process, water spends so much of energy...in some cases also powering generators. Where is all the energy coming from? From the forces that put the water at the higher altitudes in the first place.
 
Jim Yingst
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Your problem statement is inconsistent. You say that in England, 1 P == 0.9 F, and that 0.1 P buys 1 c. Fine. Then:
> Our man, John, has 1 Pound. He goes to England and exchanges it for 1 Franc and a candy.
Bologna. He pays 0.1 P for the candy and has 0.9 P left. He tries to exchange this for 1 F, and the bank points out that 0.9 P is only worth 0.81 F, based on their stated exchange rate.
I hadn't noticed the error when I first read the problem - I just worked out the idea based on the first part of the problem statement, without looking closely at the later parts. Anyway, the basic idea is the same either way - we just have to reverse some of the P's and F's, or swap "England" for "France" in some of the statements.
 
Jim Bertorelli
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Oops...you are right.
 
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