The Son of Finance of the Great Age Chapter 111

  Chapter 111 Sweden Falls (2)

  This paper was written by Zhong Yi under the instruction of Zhong Shi.

In the paper, Zhongyi explained in detail the imbalance in the development of various European countries, and because the German economy implemented a high interest rate policy in order to suppress the inflation rate, which forced other countries to adopt corresponding interest rate policies. A congenital defect, using the limited foreign exchange reserves of the central bank to attack, and finally fully expounded the fact that some countries were defeated.

What is particularly valuable is that this paper explains in detail how hedge funds operate in different markets to maximize profits, especially in the stock market, bond market, and other interest rate futures and options. , opened the eyes of the international academic community.

In particular, various methods such as long-short position strategy, arbitrage strategy, and cyclical strategy have opened the eyes of the academic community. These professors who are studying in the ivory tower usually study economic theory, and they are incomparable in terms of application. Practitioners fighting on the front line. When they see that hedge funds still have so many means, many people realize that the complexity of today's financial market is far more advanced than imagined.

   At the end of this paper, it is pointed out that the currency crisis is far from over. Even though the franc has successfully resisted the attack recently, there are still great risks in the long run. Besides the franc, several European currencies will be under attack, notably the Swedish krona.

This kind of prophecy-like words is very rare in rigorous academic papers, but no one in the international academic circles has thought to criticize this. Everyone is watching, will this currency crisis be as predicted by this paper? , and eventually the currencies of some countries will also depreciate.

  The paper also caused an uproar among hedge funds. It must be known that these professionals have also received strict economics training, and they are naturally clear about the authenticity of the operation strategy part mentioned in the paper. At first they thought it was revealed by an insider, but after checking the details of the author, they found that Louis Zhong was just a doctoral student at school, which surprised them greatly.

  However, many hedge funds quickly offered Zhong Yi an olive branch, intending to recruit him after he graduated with a doctorate. Some small hedge funds even made promises to chief strategists, but they were all rejected by Zhong Yi one by one.

  It is very difficult to enter a hedge fund, even more demanding than entering an investment bank. Investment banks in the United States recruit a very small number of outstanding graduates from the top 15 universities in the United States (usually private universities, and only one public university in Berkeley, California) to enter investment banks every year, and excellent analysts who have grown up after training in investment banks Potential access to large hedge funds.

The Swedish government reacted quickly, and the Swedish central bank specially issued a statement in mid-October. organization) to seek emergency aid to stabilize the value of the krona.

  At the same time, the Swedish Central Bank announced that it will consider raising the bank's overnight lending rate and rediscount rate in the near future, fundamentally increasing the cost of borrowing capital for international hot money, and protecting the krona together with foreign exchange reserves.

  However, the statement did not dispel the intention of international hot money, but made them more convinced that the Swedish Central Bank is a manifestation of being tough on the inside and weak on the outside and strong on the outside.

  The battle for the Swedish krona is imminent.

   Naturally, this paper was published after Zhongshi successfully converted all funds into Swedish kronor. Zhong Shi is also preventing long nights and dreams. After all, there are not many large commercial banks in the Swedish market, and the cost of borrowing will increase a lot when the rediscount rate increases.

  The main profit model of commercial banks is to absorb deposits and then release loans to make profits by using the interest rate difference between them. Therefore, there is not much liquidity left in commercial banks. When there is a large amount of foreign exchange funds that need to be exchanged, commercial banks will use those valuable bills or securities to borrow money from the central bank. This is the rediscount rate. As for the discount rate, it is an interest rate generated when an individual or enterprise urgently needs liquidity and mortgages corresponding valuable bills or securities to the bank.

  The Swedish central bank's statement did not dispel the idea of ​​those speculative funds shorting the krona. These funds shorting the Swedish krona quickly and frequently lent Swedish krona to Swedish commercial banks, and then sold them in the foreign exchange market.

In response to this situation, the Swedish central bank quickly responded and began to increase the rediscount rate, and even raised it to 500% at one point, which means that commercial banks must use a figure higher than 500% to lend to the outside world. Krona, which means that the interest rate of these krona lent is 1.38% a day, and 41.67% interest will be paid in a month.

  Naturally, this rediscount rate has seriously damaged the interest rate market, and it is impossible to last for a long time, but in order to curb the speculation of short-term international capital, the Swedish government has to do so.

Now, there are only two ways for the international speculative funds headed by hedge funds, one is to stop the loss and leave the market, and the other is to continue to sell the krona until the Swedish central bank announces that it will abandon the pegged foreign exchange system and let the krona trade in free float in the market.

The loss of the first way is to pay part of the interest. The second way is a bit more complicated. If the attack on the SEK is ineffective, the longer it lasts, the greater the cost of these capitals will be. If the SEK eventually floats freely, but no Floating to the corresponding range, these capitals will eventually lose money.

  This range is the level at which the income obtained after the depreciation of the krona is equal to the cost of short-term borrowing.

Logically speaking, the risk of the second way is much greater than the first way, but the hedge funds who have tasted the huge sweetness of the lira and the British pound will not care about this borrowing cost at all, and continue to borrow Swedish krona in the market. Then sell short in the foreign exchange market.

  This is the most primitive way, and it is also the most effective way, especially when the short side of the market is extremely powerful and works together.

Zhong Shi also thought about shorting a handful of Swedish Krona in the foreign exchange futures market, but several large commodity exchanges simply did not have similar currency varieties. Psychological expectations, related opponents and trading volume have also shrunk.

As for foreign exchange options, since the paper appeared, there are a large number of options similar to shorting the Swedish krona in the over-the-counter market, but none of the opponents dare to make similar bets. Still in my ears, the top priority of these commercial banks is also to avoid risks, selling currencies such as Swedish krona, Danish krona or even Swiss francs or assets denominated in them in the market.

  These moves by commercial banks have further increased the burden on the Riksbank.

  In late October, the Swedish Finance Minister made a speech in the media about sticking to the exchange rate, while looking for capital to settle the surging sell orders in the market, but the attack on the Swedish krona still did not stop. What made him most desperate was that the hot money invested in the stock market began to flow out at this time. With the decline of the stock market, an economic recession would be inevitable. He could even imagine that what followed would be panic among the people, followed by a bank run, and then a series of chain reactions such as the bankruptcy of financial institutions.

  Sure enough, commercial banks soon declared bankruptcy, first one, and then more banks disclosed to the outside world that the amount of non-performing assets was huge, and they were already insolvent, and they were going to seek bankruptcy protection from the government.

Since the Swedish financial system has just been opened, there are big problems in the operating mechanism and regulatory mechanism. For example, domestic investors in Sweden often borrow funds in foreign currency when borrowing, because the interest rate of foreign currency is lower than that of krona. Due to the fixed foreign exchange system, the loss of exchange rate can be basically ignored. In order to avoid the risk of foreign exchange, Swedish commercial banks also borrow cash from foreign commercial banks and lend to customers. Therefore, when the krona was attacked, foreign lending institutions realized the risk of the Swedish commercial bank and began to shrink the credit line, and the Swedish commercial bank had to ask customers to repay the loan in advance or convert the krona into the local currency. It is to sell krona; on the other hand, it is difficult for the repayer to exchange enough krona from the market at this time (commercial banks are not willing to hold it because of the expectation of krona depreciation), and the depreciation will cause high costs. Under the double blow, the loan losses of Swedish commercial banks rose sharply, and many Swedish commercial banks were forced to declare bankruptcy under such circumstances.

Finally, on November 19, 1992, after spending more than 200 billion kronor (about 35.8 billion U.S. dollars), Sweden was forced to abandon its 120-year relatively fixed exchange rate policy and let the Swedish krona float freely. In the foreign exchange market, the exchange rate of the Swedish krona against the US dollar fell by 6.63%. By November 30, the Swedish krona had dropped from 5.58 krona to 6.84 krona to 1 dollar, a drop of 22.5%, and the final drop was around 25%.

In more than a month, after paying 30 million US dollars in borrowing costs, Zhongshi's 1.6 billion US dollars in principal became 1.86 billion US dollars, with a yield of 16.25%. numbers.

  The important thing is that it is justifiable to be able to obtain such a huge return without leverage and a huge principal. Most of Zhongshi's money is invested elsewhere. Moreover, it is impossible for him to go all out like Quantum Fund to build a super large position of 5 billion US dollars.

In fact, he still has an income of 600 million U.S. dollars in OTC options. The unlucky thing is HSBC, because Zhongshi's counterparty has declared bankruptcy, and HSBC will replace this unknown commercial bank as Zhongshi's counterparty. .

  Liao Chengde and Andrew each have an income of 8.125 million US dollars, which makes them infinitely feel the great power of the currency war. What they don't know is that this type of war will happen again and again.

   It was so hard to find the Swedish krona data, I was exhausted. Such things as Baidu web pages, news information, and market software are really unreliable and superficial.

  (end of this chapter)

Chapter end