Central banks in several industrial countries recently have been buying billions of dollars worth of U.S. currency to prop up the dollar's value. Such activity can produce large profits or large losses for the government agencies involved. In this country, the Federal Reserve and the Treasury Department normally share the intervention burden equally, with the Fed conducting the actual sale and purchase of currencies.

Here are some questions and answers about the process and some of the costs:

When a central bank sells a foreign currency and buys some of its own, where does it get the foreign currency?

Usually the major central banks have large amounts of other currencies on hand. For instance, at the end of 1986, the Fed had $9.5 billion worth of foreign currencies, almost entirely West German marks, Japanese yen and Swiss francs.

In addition, as of the end of October, the Fed had agreements with other central banks for so-called currency swaps totaling $30.1 billion.

Under a swap agreement, the Fed can borrow up to the agreed amount of the other country's currency, usually for a temporary period, although some swap borrowings have remained outstanding for more than a year. The Fed can borrow up to $6 billion worth of West German marks and $5 billion worth of Japanese yen under these arrangements.

The Treasury also has an allocation of special drawing rights -- SDRs -- from the International Monetary Fund that can be exchanged for other currencies, and the United States has the right to borrow additional funds from the IMF.

Another source can be the issuance of U.S. government bonds in another country. The Carter administration issued such bonds in West Germany during the last period of great dollar weakness in the late 1970s.

With whom do the central banks deal when they intervene?

Normally they trade with large foreign exchange dealers, such as major banks. The Federal Reserve seeks the best deal it can get, sometimes acting as quietly as possible to keep its intervention secret, while at other times -- such as last week -- it wants to let the market know it is intervening to achieve a maximum impact on the price of the currency for the chosen amount of intervention.

How often do the central banks intervene in the markets and how many separate trades are made?

Details about individual trades are usually not announced; only the total amount of currencies changing hands and the timing is revealed, and even that comes with a lag.

However, the West German Bundesbank said in its 1986 annual report that it entered into 5,710 separate deals that year, up from 5,297 in 1985.

How much does all this buying and selling of currencies cost?

The actual cost of the transactions is quite small. The much greater potential cost, or opportunity for profit, is in what happens to the value of a central bank's stock of foreign currency. Its own currency holdings do not change in value in the same sense, of course.

For the United States, if the value of the dollar goes down, the foreign currency held by the Fed and the Treasury is worth more. If the dollar goes up, they suffer a loss -- which may be just "paper losses," or actually realized if some of the foreign currency is sold.

In 1986, for example, there was no intervention whatsoever by the Fed and Treasury. Nevertheless, the Fed recorded a gain of almost $2 billion on its foreign currency holdings. The Treasury had gains as well.

In the first 10 months of this year, as the value of the foreign currencies continued to rise in dollar terms, the Fed chalked up another $2.1 billion gain on its outstanding balances, and the Treasury's Exchange Stabilization Fund had a $1.8 billion gain. Those were from marking the value of the holdings to current market values.

Meanwhile, other gains were made on the foreign currencies actually sold. During the August-October period, the Fed made $93 million and the Treasury $117 million.

However, when the dollar was rising strongly back in 1983 and 1984, the value of the foreign currencies were falling in dollar terms, so losses were recorded.

The same thing is happening to foreign central banks now as the value of their dollar holdings goes down. West German Finance Minister Gerhard Stoltenberg announced plans to increase taxes there next year to reduce the government budget deficit, which has gone up partly because of $4.2 billion worth of losses at the German central bank as a result of the falling dollar.

Are the foreign currency holdings kept in a vault, or are they invested somehow?

The holdings both here and abroad are generally invested in foreign bonds, which pay interest. Foreign central banks regularly invest their dollar holdings, and such investments were a major source of foreign capital flowing into the United States last year.

The combination of foreign investment income and actual gains or losses on transactions netted the Federal Reserve $394 million in 1986. In fiscal 1986, the Treasury turned a $307 million profit on transactions and had substantial additional investment income.

The 1986 Bundesbank report noted a big drop in the amount of interest the bank received compared to the previous year.

"Despite a rise in the volume of U.S. dollar assets, the lower interest rate level in the United States and the decline in the U.S. dollar were particularly significant factors," the report said.

Since the report naturally shows figures in marks, the decline of the dollar meant that whatever interest was received in dollars on investments in the United States translated into fewer marks.