Alan and Bob each own a bar. Alan's is in very northern New York, and Bob's is just across the border in Canada.

As it turns out, at the beginning of this problem, a Canadian Dollar is worth exactly the same as the U.S. Dollar, and people are quite accustomed to using them interchangeably (including banks).

But, alas, the U.S. Government and the Canadian government get in a spat. So, the U.S. "devalues" the Canadian dollar 10%, so now they will treat it as worth 90 cents (U.S. currency). In retaliation, Canada does the same and "devalues" the U.S. dollar 10%, so they treat it as worth 90 cents (Canadian currency).

Enter Charlie.

Charlie goes to Alan's bar and purchases a 1 dollar drink and pays with a 10 dollar bill (U.S.). He receives, in change, a 10 dollar bill (Canadian). He then walks across the border to Bob's bar and purchases another 1 dollar drink, paying with a 10 dollar bill (Canadian), and he receives, in change, a 10 dollar bill (U.S.).

Charlie proceeds to continue doing this until he finds himself quite intoxicated.

I think it obvious that Charlie is gaining on these transactions. The question is.... WHO (if anyone) is losing out on these transactions?

The barmen are loosing. Alan should have taken his 10 dollar bill (Canadian) across the border and exchanged it for 11.11 dollars (US). Bob should have done likewise and changed his 10 dollar bill (US) for 11.11 dollars (Canadian). If each country was serious about the exchange rate, they would honour the currency transaction. (One of them might actually honor it).

Charlie might have enjoyed a few free drinks, but he would have been better off staying sober and playing the currency market. He should have taken his US dollars to a US bank and bought Canadian dollars. The he should have taken those to a Canadian bank and bought US dollars. He should then have continued in this manner before ending up in each bar and buying everybody a celebratory drink. Charlie was a loser.
Edited on October 31, 2003, 9:56 am

Posted by retiarius on 2003-10-31 09:35:52