1

Suppose it takes 1200 euros to visit Suriname. and I am from India. Now first i converted 1200 euros to inr which came as 93689 rupees . Then just out of curiosity, I tried converting 1200 euros to usd first and then I converted that amount of usd to inr. And i found it came back to same 93689 rupees. Like, it could happen in this way that euros to usd rate is something different so that either I get a higher rupee figure or a lower one. So How come there is the same amount, no matter I convert it directly from eur to inr or indirectly eur-usd-inr ???

  • I'm not sure where and how you are converting this. 95000 Euro are about 7.42 Million INR. Your numbers seem way off. – Hilmar Mar 22 at 17:58
  • A grave mistake i committed. Thankx to you. Nonetheless the basic question remains the same. – vikrant bhattacharjee Mar 23 at 19:17
5

If it were different, then this would produce something called "arbitrage". When arbitrage appears, it generally disappears rather quickly as people take advantage of it. For instance, suppose that Eur -> USD -> Inr gave a better rate than Eur -> Inr. Then what would happen is that people would use Eur to buy USD, use it to buy Inr, then use the Inr to buy Eur. They could then cycle through this again and again, making more and more money. This would drive up the demand for USD in Eur and Inr in USD, making those prices higher, until eventually the arbitrage disappears.

It's complicated a bit by transaction costs (I would expect that if you do Eur -> USD -> Inr you'll get a slightly worse rate than if you do Eur -> Inr, because you'll be paying exchange fees twice), but without fees, every path between two currencies should end up with the same rate.

  • in that cyclic portion, wouldnt the price of Eur in Inr also increase, because people at the same time would love to buy more Eur in order to benefit from arbitrage? and if that happens, then the real disparity would remain the same, just a nominal increase in the figures would continue, isnt it? how should i justify the convergence in prices then? – vikrant bhattacharjee Mar 22 at 17:51
  • Years ago when the Euro was introduced, one department store in Britain accepted Euro notes, paid the change back in Pound Sterling, and had the exchange rate the wrong way round. So people went to the store with a €100 note, bought some cheap items and got enough change to go to the bank and buy another €100 note, back to the store and repeat. – gnasher729 Mar 23 at 15:15
  • 1
    @vikrantbhattacharjee If you could do all this at one bank, then all the money that ends up in your pocket would come out of the banks pocket. You would assume that they figure this out. Now if one bank in India gives you say 7,500,000 rupees for 95,000 Euros, and the bank next door to it gives you 95,000 Euros for 7,400,000 rupees then one of them will figure out that they are losing money because they can't replace either their rupees or their Euros with the cash you gave them. – gnasher729 Mar 23 at 15:20

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.