I know the factors (like supply and demand) but how the economics know the value of a currency in a certain time exactly? They couldn't possibly take all the factors in the universe instantly into account! E.g. what is the formula that calculates that EUR/USD is equal 1.18792 exactly at this nano-second?
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4Simplified, you have an exchange where you can trade currencies (forex). Whatever price the last trade was at, that is the exchange rate.– RobusAug 4, 2017 at 11:54
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Thanks Robus. The last trade is the the exchange rate in the FX program, I get you. Then what about other trading programs? do they share the same record of that last trade? If yes, by whom it is managed? if no, then why all the exchange rates are fixed around the world? + before there was programs and IT for that matter, how had it been determined?– VilperAug 4, 2017 at 16:02
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1 Answer
There is no 'authority' that calculates it, it is offer and demand.
Millions of people and organizations buy and sell currencies continuously, and they are willing to buy or sell for a certain price, and that defines what the current price is. Very similar as if you sell your truck to some guy, and you discuss and agree on a price - just more people, more often.
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So the number in the currency pair market is offered by which one of these people? and how does he express it?– VilperAug 4, 2017 at 15:59
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Where are you seeing the number? If it's on a broker's website, it's the price that the broker is willing to trade with you at. There is no official number, and there is no "currency pair market" like the stock market - each broker does whatever it wants. Aug 4, 2017 at 20:28
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Great info, thanks. But then how all the rates are extremely similar all around the world like they agreed on it?– VilperAug 11, 2017 at 12:05
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1Once there is the slightest difference, people buy here and sell there immediately ('Arbitrage'), until the difference disappears– AganjuAug 11, 2017 at 12:22