Floating (Flying) Exchange Rate
Mar 25th, 2003 by Ned
I’m back from my France mini-vacation, and as far as I could tell, there was no overt Yankee-bashing going on. I saw one anti-Bush message scrawled on a subway wall but that’s about it. Their news magazines looked like our news magazines, with interested stories and simple headlines like “The War in Iraq” (as opposed to, say, “That Stupid War Those Arrogant Americans Foisted on the World”).
My flight back was uneventful, but I did learn something interesting about the euro-dollar exchange rate. According to the European Central Bank, at today’s exchange rate you could buy $1.07 with one euro. But in an Air Canada jet flying over the north Atlantic from Paris to Montreal, you can buy the same beer with either four dollars or three euros. I sense an arbitrage opportunity here.
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Interesting you mention this. There’s a classic idea seen in finance (probably other areas, too) known as “Siegel’s Paradox”. It has to do with the asymmetric appearance of exchange rates and the seemingly magical effect this has on buying power.
The abstract math people like to think of Siegel’s Paradox by saying something like E[1/(exchange rate)] > 1/E[exchange rate]. I never like that, though. Instead, I preferred thinking about how much French and Californian wine Siegel’s Paradox can buy you. When I get a chance, I’ll write more on this. It’s a neat example. Maybe this will be my next glog! ;)
This link has a much better equation that the expected value one I previously posted:
http://mathworld.wolfram.com/SiegelsParadox.html
These equations also provide a more intuitive feel for how the exchange rate magic in my upcoming example comes about.
Mon Dieu! We are paying for beer on international flights now? The end is truely at hand. Repent.
Wait a second… I have to confess that the cost I described was for cocktails. Beer and wine are still free. I had a few free cans of the Molson. Maybe that’s why I forgot.
Danger, Will Robinson, Dandger! You have no idea the stress I’ve been under. Thank you for clearing that up. Ciao.
Siegel’s paradox aside, perhaps you are also ignoring the fact that its a one-sided market.
Meaning you are always buying cocktails/beer
and the host/hostess is always taking your euros/dollars. So there is no way for you to enforce arbitrage. Since you can’t make round trip trades. :)
I just need to get a little carry-on drinks cart for myself. Once I buy out most of their supply, I can travel along right behind them undercutting their prices. I don’t think they’ll mind.