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+--- Thread: What's to stop somebody from doing this.... (/Thread-What-s-to-stop-somebody-from-doing-this)
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What's to stop somebody from doing this.... - rickyjo - 06-12-2010
The thought just occurred to me the other day, I'm confident there is mechanism built in to make this impossible; however, I cannot figure out what it could possibly be unless my whole understanding of the system is wrong. I've never traveled and simply have no idea.
Say there is an exchange rate for money X vs the dollar of 2 vs 1. Say that money X can be converted to money Y at an even exchange rate of 1 vs. 1. Finally say money Y converts at 1.5 vs 1 to the American dollar. In my hypothetical scenario one could convert dollars to X and then X to Y and then back to dollars at a profit. Why doesn't this work?
I'm sorry, it's just bothering me. I, a silly, uneducated, untraveled 21 year old wants to know. I can't figure out how to ask google this question, it's a poor explanation in this context, let alone the rigid confines of a search engine.
What's to stop somebody from doing this.... - alissaroot - 06-12-2010
This does work. People exchange currencies all the time for profit: Making Money With Currency Exchange Rates | eHow.com
The trouble is guessing how or when currency exchange rates will be in your favor.
What's to stop somebody from doing this.... - shortysforever - 06-12-2010
The other thing to consider is that you are generally paying a fee to convert currencies. Places like airports charge higher rates because they know people are leaving the country and don't really have another option. To prove my point... if I were to exchange 100 USD into Thai Baht I would receive around 3,200 Baht, if I then turn right around and sold back the Baht for Dollars I would receive something like 92-95 USD, all because of fees. So not only do you have to be able to predict the future, not much different than the stock market, but you also will end up paying conversion fees.
MJ
What's to stop somebody from doing this.... - IgnazSemmelweis - 06-12-2010
Arbitrage - Wikipedia, the free encyclopedia
What's to stop somebody from doing this.... - IgnazSemmelweis - 06-12-2010
Not sure if the CC companies have clamped down on this yet but...
People were buying gold and silver on their credit cards to rack up reward points/cash back offers, then turning around and selling the gold and silver to get their investment back with frequent flyer miles or cash back for their troubles.
Back in ye olden days, when you could still get cash back miles for transferring credit card balances, people would just rotate balance transfers between their credit cards to build up the miles.
All these are examples of what you're talking about.
The power of arbitrage: ask Mr. Pickles | http://www.bullfax.com
Enthusiasts of frequent-flier mileage have all kinds of crazy strategies for racking up credits, but few have been as quick and easy as turning coins into miles.
At least several hundred mile-junkies discovered that a free shipping offer on presidential and Native American $1 coins, sold at face value by the U.S. Mint, amounted to printing free frequent-flier miles. Mileage lovers ordered more than $1 million in coins until the Mint started identifying them and cutting them off.
Coin buyers charged the purchases, sold in boxes of 250 coins, to a credit card that offers frequent-flier mile awards, then took the shipments straight to the bank. They then used the coins they deposited to pay their credit-card bills. Their only cost: the car trip to make the deposit.
What's to stop somebody from doing this.... - rickyjo - 06-12-2010
Amazing! People are so innovative.
Back to the original question, perhaps I'm not quite understanding why one would have to "see the future", does the market work at such equilibrium that you cannot do this without waiting a few days for changes to occur? I perhaps am falsely assuming that one could immediately trade for a profit. Is this not so?
What's to stop somebody from doing this.... - FenderNed - 06-12-2010
rickyjo Wrote:The thought just occurred to me the other day, I'm confident there is mechanism built in to make this impossible; however, I cannot figure out what it could possibly be unless my whole understanding of the system is wrong. I've never traveled and simply have no idea.
Say there is an exchange rate for money X vs the dollar of 2 vs 1. Say that money X can be converted to money Y at an even exchange rate of 1 vs. 1. Finally say money Y converts at 1.5 vs 1 to the American dollar. In my hypothetical scenario one could convert dollars to X and then X to Y and then back to dollars at a profit. Why doesn't this work?
I'm sorry, it's just bothering me. I, a silly, uneducated, untraveled 21 year old wants to know. I can't figure out how to ask google this question, it's a poor explanation in this context, let alone the rigid confines of a search engine.
That's funny that you posted this question today. While waiting at the airport to board my flight from Belgium back to the US today, I found myself reading the exchange board at one of the convenience based exchange kiosks. The US to Euro rate is roughly $1.21-1.26 right now. This exchange bank will sell you a Euro for something like $1.36. At the same time, they will buy back Euros from you for $1.18. So you can see that they make money no matter which transaction they are conducting.
Travel tip: When you go overseas, take some cash to convert in an emergency but plan on finding an ATM. Many times these are located near the baggage claim at the airport. You will receive local currency at the bank rate versus a premium and in many cases, you won't even have to pay a bank fee.
What's to stop somebody from doing this.... - Farmerboy - 06-12-2010
There are so many companies and computers that watch exchange rates that any time a scenario like that comes up is immediately exploited until the currencies balance. It is pretty hard as an average joe to make it work but definitely possible!
What's to stop somebody from doing this.... - rickyjo - 06-12-2010
Oh, I get it. The very act of taking advantage of the system corrects the system. That makes sense. I've been trying to wrap my head around it all day.
Thank you all for your helpful comments.
What's to stop somebody from doing this.... - CLEP101 - 06-13-2010
rickyjo Wrote:The thought just occurred to me the other day, I'm confident there is mechanism built in to make this impossible; however, I cannot figure out what it could possibly be unless my whole understanding of the system is wrong. I've never traveled and simply have no idea.
Say there is an exchange rate for money X vs the dollar of 2 vs 1. Say that money X can be converted to money Y at an even exchange rate of 1 vs. 1. Finally say money Y converts at 1.5 vs 1 to the American dollar. In my hypothetical scenario one could convert dollars to X and then X to Y and then back to dollars at a profit. Why doesn't this work?
I'm sorry, it's just bothering me. I, a silly, uneducated, untraveled 21 year old wants to know. I can't figure out how to ask google this question, it's a poor explanation in this context, let alone the rigid confines of a search engine.
I did that all the time in Korea with the Korean Won. It was an average of 1050 Won vs. 1 USD. When ever the WON went up to 1300, I would buy it and save it until it would go back down closer to 1000, then I would sell it back. But in order to make a good profit I would have to spend at least 2K or 3K grand USD. the most I would usually buy at a time was $1,500 USD X 1290 WON = 1,935,000 WON. When I would sell that back at 1050 i would make around $1840 USD or $340 USD profit. :coolgleam: