Saturday, April 21, 2007

Dammit its crossed 2 !!!! yippppppeeee .... arrrggggggggghhhhh

Haha, I am not talking about Sachin Tendulkars score, and the cheers which Indian cricket fans might have when he scores a few runs but I am talking about the Pound Sterling (GBP) the lawful currency of the United Kingdom which has appreciated to be worth more than 2 USD.

Working on the trading floor in an investment bank, we all were anticipating this move since last december, that it might occur some time, but it finnaly breached the barrier last week.
And we heard the cries of anguish and happy depending on which trader was long or short which currency.

All the colleagues and friends started talking about, how this might affect their bonus at the end of the year. (Since we all work in an American Bank, compensation is in USD, but we live in UK so expenses are in GBP)

And all my indian friends are complaining about how their wealth has fallen due to the surging rupee (INR). (INR went up from being 46 to the USD to 41.68 in the last couple of months)

Even for me it has been mixed feelings all my current savings are worth more, and my parents are suddenly richer (though not that they would ever understand the currency markets)
My future earnings might be a little lower.
But dammnit. Why complain in currencies moving by 5-10% a year when I should be more bothered about increasing my own salary by working harder (or should i say smarter??)

Anyways not all my readers might appreciate the importance of this post, people might consider what is the importance of currency rates (and many including my parents think they are normally fixed through out) the FX rate and the interest rate in the different economies provide tremendous arbitrage opportunities.

Take for instance the Yen carry trade. People borrow in japanese yen (at 1% per annum) and deposit money in US Dollars (at 5% per annum) this looks like neat 4% profit, but you are exposed to the currency fluctuations.

I guess bigger than the Yen carry trade has been the Turkish Lira and the Brazilian Real.
With Rates being 16-20% and the currency appreciating, its sure has been some investment.
(Imagine, you could borrow in Yen at 1% and invest in Turkish Treasury bills and get a return of 18%, so much money to be made, just for taking some currency risk!!!)

Well though all these ideas appear fantastic in hindsight, if one loses on such trades, you would surely be branded as an idiot.

Anyways enough of gyaan on FX (foreign exchange for my non banker readers) lemme now mope around on my loss of future wealth. :P


Gypsy said...

Hey Nirav, quite an informative post I must say! I have always wondered about all this trading and investment banking stuff many of my friends do here in the US.

Nirav Kanodra said...

Hey Gypsy,

I am not sure how good it was actually, if your trader friends read it they might scoff at you.
And by the way Turkish Lira has gone up by 10%. (to add to 18% interest rate) Surely some people might have made a bundle.
With US Dollar weakening, the rest of the world has just gotten richer