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agate_ t1_ixyece9 wrote

No one person sets the price. It emerges through the actions of many buyers and sellers. Let’s suppose I run a bank and have extra yen and want to buy dollars. I offer to pay 139 yen per dollar. Other people and banks are less desperate to get rid of their yen: one offers 138, one offers 137 yen per dollar. Other folks are looking to sell dollars: they want 141, 140, and 139 yen.

I can do a deal with that last guy. I buy up his dollars, and now the low offer is 140. If I want more I’ll have to pay 140 for them. The new price is 140.

Now you come along with tons of dollars to sell. You sell me all I want at 139 yen. If you want to sell more, you’ll have to sell to the next guy who’s offering 138. The new price is 138.

At every moment, the price is set by the most generous offer that nobody is yet willing to meet.

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nowjeon906 OP t1_ixyp18w wrote

>I can do a deal with that last guy. I buy up his dollars, and now the low offer is 140. If I want more I’ll have to pay 140 for them. The new price is 140.

How does this kind of price-changing happens in reality? I suppose it is all instantaneous, so... Does each organization have their own software that automatically gathers data regarding current global prices (including the most generous offer across the network) and sets 139, 140, 141... accordingly as their offer price at that point in time?

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willtantan t1_ixyuost wrote

I am no expert. Below is just one hypothetical scenario. Let's say you go to a currency exchange stand to buy Euro. Euro price will be set by currency exchange stand, this price will include cost of currency stand business plus FX rates from their broker. Their brokers are probably some local small banks. Small banks will trade with larger banks like Citibank. Larger banks will trade with each other to set the FX rates. Governments will also participate in interbank market to influence FX rates. So FX rates are ultimately set up by interbank market.

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