/biz/ - Business & Finance

1. FX Volatility and Margin
Libra will be pegged to a basket of cash and short term highly liquid securities from highly rated countries (USD, GBP, EUR, CHF etc etc). However, this does not account for the risk of FX rate volatility in those currencies.
For example, on Day 1 you might have 100m Libra coins which is backed by the equivalent of 100m USD (after translation) worth of cash and securities, but this is spread across the above currencies. Therefore, 1 Libra = 1USD equivalent. Now imagine that GBPUSD falls (i.e. 1 GBP buys less USD than the day before). If we convert all of our cash and securities back to USD again, we find that we now have less than 100m USD equivalent since our GBP cash and securities have declined. As a result, 100m Libra tokens are now worth 99.8m USD, therefore 1 Libra now only equals 0.998 USD.
The inverse is true if we translated all our cash and securities into GBP. Since the USD has gained against GBP, our cash and securities are now worth more in GBP than the day before.
As a result, owners of Libra will see fluctuations in the value of their coins as a result of changes in FX rates.