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Exchange rate mechanisms
Hi Kathy, Boris and the team.
Could you explain the mechamism for the precise arithmetic relationship between all currency pairs. For example, at any given time, if the exchange rate for EURUSD is divided by GBPUSD the exchange rate for EURGBP is obtained, to within a couple of base points. This relationship is true for all other currencies that the Euro and British Pound are paired with . e.g. EURGBP = EURJPY / GBPJPY etc.
As a novice trader, I was under the impression that exchange rates were determined independently for each currency pair by normal supply/demand mechanisms. If this were the case, then surely there would not be this fixed relationship between related currency pairs. I understand the need for all currency pairs to "balance", to prevent arbitrage, but I am interested in what the underlying mechanism is that causes this exact relationship.
Many thanks for all the great work (and books) that you author,
Best Regards
Geoff
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