The story took place in a small town on the border between the United States and Mexico. A tourist bought a 0. 1 peso beer in a small town on the Mexican side. He paid 1 peso and got back 0.9 peso. He went to a small town in the United States and found that the exchange rate between US dollar and peso was 1 US dollar: 0.9 pesos. He changed the remaining 0.9 pesos into 1 USD, bought a bottle of beer with 0. 1 USD, and got back 0.9 USD. Back in a small town in Mexico, he found that the exchange rate between peso and US dollar was 1 peso: 0.9 US dollars. So he changed $0.9 into 1 peso and bought beer to drink, so that there was 1 dollar or 1 peso after drinking in two towns. In other words, he got free beer.
Arbitrage activity
The tourist can continue to drink free beer in these two countries because the exchange rates in these two countries are different. In the United States, the exchange rate of US dollar and peso is 1: 0.9, but in Mexico, the exchange rate of US dollar and peso is about1:1. In Mexico, the exchange rate between peso and US dollar is 1: 0.9, while in the United States, it is about1:1. It was on the basis of the exchange rate difference between the two countries that the tourist carried out arbitrage activities and drank free beer. Beer is free, that is, people who drink it don't spend money, and hotels still charge money. Who paid for it? If the exchange rate of the United States is correct, Mexico underestimates the value of the peso and Mexico pays for the beer. If Mexico's exchange rate is correct, the United States underestimates the value of the dollar, and the beer money is paid by the United States. If the exchange rates of the two countries are incorrect, the money will be paid by both parties.
When the exchange rate is set incorrectly, someone will engage in arbitrage activities, that is, exchange one currency for another currency with overvalued exchange rate, and then exchange another currency with undervalued exchange rate for the original currency. Arbitrage is an arbitrage activity in the market, that is, buying at a low price, selling at a high price and obtaining the difference. When the country strictly controls foreign exchange and sets the exchange rate, and the exchange rate is inconsistent with the actual purchasing power of money, there must be arbitrage. In old China, four families seized state property through arbitrage. In the early days of our reform and opening up, many people made money by arbitrage. If only tourists on the US-Mexico border drink some free beer, the loss is not great. However, if there is more than one beer trade between the two countries and more than one tourist, the loss will be great.