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For a financial novice, it's unclear what Soros actually did. It would be useful to explain what "shorting the pound sterling" actually means and the mechanics

For a financial novice, it's unclear what Soros actually did. It would be useful to explain what "shorting the pound sterling" actually means and the mechanics by which that places pressure on the Bank of England.

andsoitis 4y ago
> It would be useful to explain what "shorting the pound sterling" actually means This article (https://www.investopedia.com/articles/forex/08/greatest-currency-trades.asp https://www.investopedia.com/articles/forex/08/greatest-curr...) talks about going short, going long, strangle and straddle, it also talks about a couple of illustrative events, including Soros v. British Pound.
- kareemsabri 4y ago
  Thanks.
t_scytale 4y ago
Here's my understanding of the details. At the time the Bank of England had committed itself to maintaining the value of Sterling at a rate that was widely considered to be too high. Soros and a bunch of other large funds and banks decided to take on a coordinated short position. So they... - borrowed very large sums of Sterling - exchanged the Sterling for Dollars (or maybe DeutschMarks?) - waited for Sterling to depreciate - Sterling now being much cheaper they then used the Dollars to buy back the original loan amount of Sterling and have plenty of Dollars left over - repaid the loans The large amounts of Sterling that they were selling would have increased the downward pressure on the price of Sterling, forcing the Bank of England to sell foreign currency reserves to keep the value within the narrow limits it had committed to as part of the ERM. Due to the open nature of the market other currency speculators would have been aware that all this was going on, and they too started shorting Sterling, further increasing the pressure and forcing the BoE to sell more reserves. At some stage it became apparent that this was unsustainable and Britain exited the ERM and devalued the currency, creating massive profits for the speculators.

andsoitis 4y ago

> It would be useful to explain what "shorting the pound sterling" actually means This article (https://www.investopedia.com/articles/forex/08/greatest-currency-trades.asp https://www.investopedia.com/articles/forex/08/greatest-curr...) talks about going short, going long, strangle and straddle, it also talks about a couple of illustrative events, including Soros v. British Pound.

kareemsabri 4y ago
Thanks.

t_scytale 4y ago

Here's my understanding of the details. At the time the Bank of England had committed itself to maintaining the value of Sterling at a rate that was widely considered to be too high. Soros and a bunch of other large funds and banks decided to take on a coordinated short position. So they... - borrowed very large sums of Sterling - exchanged the Sterling for Dollars (or maybe DeutschMarks?) - waited for Sterling to depreciate - Sterling now being much cheaper they then used the Dollars to buy back the original loan amount of Sterling and have plenty of Dollars left over - repaid the loans The large amounts of Sterling that they were selling would have increased the downward pressure on the price of Sterling, forcing the Bank of England to sell foreign currency reserves to keep the value within the narrow limits it had committed to as part of the ERM. Due to the open nature of the market other currency speculators would have been aware that all this was going on, and they too started shorting Sterling, further increasing the pressure and forcing the BoE to sell more reserves. At some stage it became apparent that this was unsustainable and Britain exited the ERM and devalued the currency, creating massive profits for the speculators.