(I used to work at an investment bank working on algorithmic market making for currencies)
In theory how it would work is that your payment processor would get a price from an FX broker who would guarantee it for a fixed period of time (say 15 minutes) but would offer a worse FX spread with the difference between the offered spread and the market spread being their compensation for taking the risk.
The FX broker would mitigate some of their risk internally (against other customer who want to transact in the opposite direction) and through purchasing spot/forwards/options. As the volatility of the market increased the broker would widen their spread so as to avoid being over-exposed at any point. The business of the FX broker would fundamentally be one of risk-management.
So from a customer view point they'll get a crappy exchange rate compared to what they'd get from a BTC exchange, but they'll be able to do the transaction.
In reality this is quite similar to what happens in multi-currency transactions anyway, if you're buying something priced USD with a EUR credit card you'll typically:
1) Get a "frozen" rate (i.e. you'll get charged a specified amount of EUR) which is worse than market rate (as described above) .
2) Get charged the USD price at whatever the market rate is (-ish, there's still some markup on this) at the time the transaction goes through.
(some smaller vendors just have fixed prices in different currencies; this means that the vendors themselves are taking the currency risk)
Comments
(I used to work at an investment bank working on algorithmic market making for currencies)
In theory how it would work is that your payment processor would get a price from an FX broker who would guarantee it for a fixed period of time (say 15 minutes) but would offer a worse FX spread with the difference between the offered spread and the market spread being their compensation for taking the risk.
The FX broker would mitigate some of their risk internally (against other customer who want to transact in the opposite direction) and through purchasing spot/forwards/options. As the volatility of the market increased the broker would widen their spread so as to avoid being over-exposed at any point. The business of the FX broker would fundamentally be one of risk-management.
So from a customer view point they'll get a crappy exchange rate compared to what they'd get from a BTC exchange, but they'll be able to do the transaction.
In reality this is quite similar to what happens in multi-currency transactions anyway, if you're buying something priced USD with a EUR credit card you'll typically:
1) Get a "frozen" rate (i.e. you'll get charged a specified amount of EUR) which is worse than market rate (as described above) .
2) Get charged the USD price at whatever the market rate is (-ish, there's still some markup on this) at the time the transaction goes through.
(some smaller vendors just have fixed prices in different currencies; this means that the vendors themselves are taking the currency risk)