How can a central bank peg the value of its currency relative to another currency?

What will be an ideal response?

To peg the value of its currency to another currency, the government must make a market in the two currencies. If there is excess supply of the foreign currency (which is equivalent to excess demand for the domestic currency) that would drive down the domestic currency price of the foreign currency, the government must buy the private excess supply of foreign currency and deliver domestic currency to those demanding it. On the contrary, if there is excess demand for foreign currency (which is equivalent to excess supply of domestic currency) that would drive up the domestic currency price of the foreign currency, the government must supply the foreign currency and demand the domestic currency to prevent the foreign currency from appreciating in value.