# kaal:claim:3402701-019

**Claim.** Selling currency into a reserve when price is above the peg and buying it back with the reserve when price is below the peg yields an arbitrage profit, so a reserve can fund its own defense of the peg.

**Type.** mechanism  **Support.** argued

**Holds when.**

- the reserve currency is more stable than the base currency
- the cost to implement and maintain the reserve is ignored

**Source quote.**

> In the next paragraph we demonstrate the obvious result that selling the currency when the price is high to build a reserve, then buying the currency back with the reserve when the price is low will yield an arbitrage profit

**From.** Craig Calcaterra, Wulf A. Kaal, Vadhindran K. Rao, *Stable Cryptocurrencies - First Order Principles* (2019), 3.1.2.2 Reserves, page 19

**Cite as.** Craig Calcaterra, Wulf A. Kaal, Vadhindran K. Rao, Stable Cryptocurrencies - First Order Principles (2019). SSRN: https://ssrn.com/abstract=3402701

**Verify.** sha256 of source PDF `72ed2581b4cac2bd18a5b2640be959487a3cbc34c86ab5e5664924bcdb53c8e0` at https://raw.githubusercontent.com/wulfkaal/Academic-Papers/main/papers/pdf/Calcaterra%20et%20al.%20-%202019%20-%20Stable%20Cryptocurrencies%20-%20First%20Order%20Principles.pdf

**Topics.** institutional-design

**Keywords.** reserves, arbitrage, quantity-theory-of-money, peg-defense

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