Monetary Market: How to benefit? (PART I)

Day 689, 08:32 Published in Netherlands Belgium by Boklevski

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Monetary Market: How to benefit? (PART I)

This will be a very long article. I even split it up in two parts. This first one will be the more theoretical one, the second part will describe what it really means for you.

If you’re not interested in information on how the monetary market works and how to trade on the monetary market, don’t read it. No, really… in that case, you can do way better things with your time. Or at least, I hope.

Someone asked me how the monetary market, and the (variable) exchange rates, could offer opportunities. As this is a quite complicated question, I cannot fit the answer in 1 PM back, and as everybody might find some interesting information, I’ll just write an article about it and publish it.


1. Introduction of the monetary market

So what is the monetary market? Well, in short, it is a place where you can exchange any currency (including Gold) with other currencies. (*1)

1.1 Exchange rates in an ideal market

According to Dr. Frank Shostak (*2), we should be able to determine the exchange rate ourselves, so let’s give it a try. Dr. Shostak claims, we can look at what something costs in another country. Let’s take eFrance as example (it’s bigger, so more an ideal market, and it’s close by).

1 Q1 food in the eUNL costs 1.21 NLG at the moment of writing this article. 1 Q1 food in eFrance costs 0.70 FRF. That said, we can use ‘purchasing power parity’ to state that 1.21 NLG = 0.70 FRF. So we can expect the NLG to FRF rate to be (1.21 / 0.70 = ) 1.42857 NLG = 1 FRF. There are no NLG/FRF offers on the market, but fortunately, we still have goldprices, and we know that 1 FRF = 0.022 G at the moment. So if 1.42857 NLG = 1 FRF = 0.022 G, that means that 1 NLG = (0.022 / 1.42857 = ) 0.0154 G.

Our current rate is (surprise!) 1 NLG = 0.016 G. Seems Dr. Shostak is right! Basically, if we would compare this for all countries and all products, we should find the exact expected rate of the NLG, especially if we take the big economies more into account than smaller ones. Oh, by the way: 60 economies x 12 products… I hope you don’t expect that I will really do that.

1.2 Exchange rates in eUNL market

However, no market is ideal. It’s just theoretical.

So if they don’t make that calculation every time, how are the exchange rates determined by those people that place those offers? Good question, glad you asked. Basically, it’s beliefs. No difficult calculations, comparing other currencies, taking inflation into account… it’s just a matter of beliefs. Currently, we have the strong belief that 1 NLG is worth around 0.016 G. If anybody puts an offer of 1 NLG = 0.015 G on the market, people are really willing to buy the offer, as they believe they can sell it for 0.016 G immediately after. This government mandate, the government has agreed to keep the rate on 1 NLG = 0.016 G. So if an offer of 0.015 is placed, basically the government will buy it and sell for 0.016; and when you place an offer of 0.017, it will not be sold, as the government’s offer is lower. Therefore, the current believe that 1 NLG = 0.016 G is quite strong. The reversed rate is 1 G = 63,45 NLG. This is really close to the lowest possible rate (when 1 G = 0.016) of 1 G = 62,5 NLG, which proves there’s little uncertainty in the monetary market. Why the 1 G = 62,5 NLG offer is the lowest, I’ll explain later.

There is prove that adjusting these beliefs does impact the prices. A few days ago, the Serbian government agreed to try to get the rate to 1 G = 0.014 RSD instead of 1 G = 0.013 in a few days. However, in less than 5 minutes, all offers of 0.013 G disappeared from the market, as investors believed they could sell it for 0.014 G in a few days. Therefore, the government doesn’t even have to intervene in the market, but can just speak out intentions which can change the market, as it changes beliefs.

1.3 Possible actions

Let’s focus on the eUNL goldmarket only for the moment. Basically, you can do four things:
- Sell any NLG you have (- NLG / + G)
- Sell any Gold you have (- G / + NLG)
- Buy any Gold offered on the market (- NLG / + G)
- Buy any NLG offered on the market (- G / + NLG)

Now, isn’t selling NLG the same as buying Gold? Of course, the answer is no (otherwise, I wouldn’t have made four options). When you buy Gold, you accept an offer that has been made by someone else. The rate is fixed for you, as you cannot change the offer. As you accept an offer, it is immediately fulfilled when you click the button. The NLG is extracted, and the Gold added to your accounts.
Now, if you sell NLG, you post an offer on the monetary market. You determine the rate. However, the offer is only used when somebody else accepts your offer. So only after somebody else accepts your offer, the NLG is extracted from your accounts and the Gold added. (Please not that the NLG is extracted immediately from your in-game account and put on the monetary market. However, you can remove your offer, and receive the NLG back, so I’ll just consider it “your” NLG when it’s not accepted.)

As you can determine your own rates when selling, it is more profitable to sell than to buy. The eRep wiki states that selling is better “because exchange rates fluctuate, and you hold a large amount of an unfavorable currency, there may never be a way out without loss.” (*3) I personally feel that’s just a wrong statement, but I just wanted to put it here to be complete. I’ll get more into detail in PART II on why selling is better than buying. You’ll see it has nothing to do with fluctuating rates.

VIEW PART II

(*1) http://wiki.erepublik.com/index.php/Monetary_market
(*2) http://www.gold-eagle.com/editorials_03/milhouse053103.html
(*3) http://wiki.erepublik.com/index.php/Monetary_Market_Speculation