Currency peg.

In plain English

A currency peg is a promise that one unit of a country's money will trade at or very near a fixed price in another currency, often the dollar or the euro. To keep the promise, the central bank stands ready to buy its own currency when it weakens and sell it when it strengthens, using its reserve pile as ammunition. Some pegs allow a narrow band around the target. A currency board goes further and backs the domestic money base with foreign reserves close to one for one. The price of a peg is monetary independence, because interest rates have to follow the anchor country whatever the local economy needs.

01Why it matters

A peg keeps prices predictable for importers and travelers while it holds, but it concentrates the risk into a single event, because when a peg breaks the adjustment arrives all at once.

02The math, step by step

Say the peg is 7 per dollar and the central bank holds 30 billion dollars of reserves. Defending against steady selling costs 3 billion dollars a month. At that burn rate the reserves last 10 months, and traders can run that same calculation.

Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.

03What this is NOT

04Receipts

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