CH61
The remaining time until the vote is about two months.
As soon as the company's policy was decided, Hyunjoo swiftly took action. OTK Company raised money from a financial company by using the shares it held as collateral.
If the loan was not repaid by the agreed period, the collateral would automatically transfer.
Various financial institutions, including private equity funds, sovereign wealth funds, and investment banks, had been eyeing the shares held by OTK Company for some time. They had received numerous offers to sell.
It was a profitable deal with no risks, so people were lining up to lend money everywhere.
We borrowed money and entrusted the shares of each company to the highest bidder through an auction process.
There is no place where rumors spread as quickly as in the financial market. The fact that OTK Company was borrowing money spread throughout the entire financial industry in an instant.
The cash we raised amounted to a total of $10.8 billion.
If we couldn't repay the borrowed money on time, all the shares pledged as collateral would be lost, and OTK Company would go bankrupt.
Even if Brexit becomes a reality, there would be no collapse in the UK financial market. The pound might only drop by 10-20%. Therefore, it is difficult to increase profits through spot investments alone. That's why I considered FX margin trading.
It involved leveraging funds tenfold to make bets. There would be high fees and interest to pay until the trades were closed, and huge losses could occur if the predictions went wrong…
"In gambling, all problems are solved," is a common saying among those who borrow money for gambling, but it's not entirely wrong.
Once everything was prepared, I gave the order.
"Let's begin."
OTK Company's target was the foreign exchange markets of the UK and Japan.
***
To understand our strategy, you first need to understand the mechanism of how the foreign exchange market operates.
"What exactly is the foreign exchange market?"
I responded simply to Taekgyu's question, "It's literally where you buy and sell money."
Money is a means to purchase goods, not a commodity itself. While you can buy a toy with 10,000 won, you can't buy 10,000 won with 10,000 won, right?
However, in the foreign exchange market, money is traded as a commodity. You can buy 9 dollars with 10,000 won and then buy 10,000 won with 9 dollars.
So, how can you make money in the foreign exchange market?
The answer is to buy low and sell high. Alternatively, sell high first and then buy low later.
When '1 dollar = 2000 won,' you sell 1 dollar to buy 2000 won, and when '1 dollar = 1000 won,' you sell the 2000 won to buy 2 dollars. This way, you can double your earnings.
The reverse is also possible.
When '1 dollar = 1000 won,' you borrow 1000 won to sell and buy 1 dollar. Later, when '1 dollar = 2000 won,' you sell the 1 dollar bought earlier to buy 2000 won and repay the 1000 won you borrowed. This way, even after repaying the debt, you will have 1000 won left in your pocket.
"In this way, in 1992, a certain investor cleaned out the UK foreign exchange market."
That investor was none other than George Soros, the operator of Quantum Fund.
At that time, the UK adopted the Exchange Rate Mechanism (Peg System) to keep the German mark and their currency pound within a certain band.
However, when the mark strengthened, the pound also strengthened, and due to high interest rates and a low exchange rate, the UK economy suffered.
Exchange rates are closely related to the economy.
When the economy struggles, naturally, the currency value should drop. However, since it was pegged to the mark, despite the worsening economy, the pound's value remained high, leading to a peculiar situation.
Investors (or speculators) didn't miss this opportunity.
George Soros, deeming the pound overvalued artificially, launched an attack on the UK foreign exchange market.
He borrowed a massive amount of pounds, then sold them in the foreign exchange market to buy dollars.
When the pound increased and the dollar decreased in the foreign exchange market, naturally the value of the pound went down and the value of the dollar went up.
(TL/n - Supply increases but there's no demand so the pound value should fall)
However, because the pound is linked to the mark, it cannot fall below the band.
To defend the value of the pound, the UK government released foreign exchange reserves, selling dollars and buying pounds.
Thus, a war broke out between hedge funds selling pounds and the UK government buying pounds.
"What was the result?"
"The UK got completely wrecked."
The first to run out of money was the UK government.
When the foreign exchange reserves ran out, they had no choice but to surrender. The UK government abandoned the pegged exchange rate system and gave up defending the exchange rate.
As a result, the Bank of England went bankrupt, and the pound plummeted by nearly 30%.
George Soros bought the plummeting pound, repaid the pounds lent to the UK, and left the UK market with astronomical profits. "There is a saying by Karl Marx, history repeats itself twice, the first as a tragedy, the second as a farce."
"What do you mean?"
"Similar events occurred later in Asia, five years later."
In 1997, George Soros targeted Indonesia and Thailand. Ruthless selling by Quantum Fund caused the rupee and baht to collapse, triggering the Asian financial crisis.
In this crisis, South Korea also hit the bottom of its foreign exchange reserves and had to urgently borrow dollars from the IMF to avoid default.
Through these two events, George Soros gained notoriety as the grave dancer and global speculator, becoming a legend among hedge funds.
"Our strategy is somewhat similar on a larger scale."
However, there is one decisive difference here – the impending international event of the Brexit vote.
If the outcome is to remain, the UK government might not need to defend itself by releasing foreign exchange reserves and the exchange rate will stabilize on its own.
Conversely, if the outcome is to leave, it will be difficult to prevent a pound crash no matter what they do.
"We just have to wait until the vote results are out."
***
There aren't many markets that can digest a sum of money exceeding $100 billion in a short period of time.
The foreign exchange market is so massive that it's difficult to compare with the stock market, but when such a large amount of funds converges in one direction, the market prices are bound to fluctuate.
Foreign exchange speculation is akin to playing poker with revealed cards from the beginning. Whether attacking or defending, both sides know each other's means and objectives very well.
With each side understanding the other's strategy, it becomes a showdown of money being shot like bullets. If there's no more money to pour into the foreign exchange market, hedge funds lose, and if a country runs out of foreign reserves before that, the nation bears the loss.
Winning brings astronomical profits, but losing means bankruptcy.
Having more allies favors the attacking side. Hence, hedge funds, before attacking the foreign exchange market, publicly criticize the economy and exchange rate issues of the targeted country to gather as much support as possible.
Even in 1992, if the Quantum Fund had stood alone against the UK government, the first to raise their hands would have been George Soros.
However, many hedge funds sided with George Soros, and the UK government, unable to withstand the barrage of money thrown at them, eventually surrendered.
My strategy was completely different in this regard.
It's not us but the British citizens with voting rights who can bring down the British government.
Therefore, it was crucial to avoid creating the perception that foreign exchange speculative forces were trying to exploit the UK foreign exchange market.
So, dividing OTK Company's funds into two parts, we sold pounds on one side and bought yen on the other.
If it had been a less traded currency, the exchange rate would have fluctuated immediately. However, since pounds and yen were major currencies, with daily astronomical trading volumes in USD-GBP and USD-JPY, we conducted our trades as quietly as possible over time.
But as they say, a long tail is easily stepped on, right?
As we continued pouring out our holdings, the exchange rate started moving in one direction. The fact that we were conducting FX margin trading with borrowed money spread throughout the financial industry.
When the exchange rate moved excessively, we had to devise a different strategy. Fortunately, this issue was automatically resolved by the market.
As the pound became undervalued and the yen overvalued, financial companies including hedge funds, who had been watching cautiously all along, sprang into action.
"Watch these guys."
They sided with the government. In other words, they bought pounds from the British government and sold yen to the Japanese government.
In a typical situation, our defeat was almost certain at this point.
The ammunition we had prepared was only 100 billion dollars. Even that was dispersed due to fighting the war in both foreign exchange markets.
Considering that George Soros had poured out a trillion dollars when he fleeced Britain, this level of capital was simply not enough.
Taekgyu said, "Isn't this a bad situation?"
I shook my head.
"No. It's the opposite."
London Foreign Exchange Market.
Foreign exchange dealers moved their hands busily to process the surging orders.
As the pound's value declined due to continued selling, the government responded by releasing foreign reserves, and other financial institutions that predicted a rise in the pound also joined the buying frenzy.
However, as the pound began to rise again, massive selling orders poured out as if they had been waiting.
Josh muttered as he watched the constantly changing exchange rates.
"Are they planning to keep shorting as long as there's demand for selling orders?"
This kind of speculative trading is now avoided even by hedge funds. The decreased likelihood of success, coupled with the unbearable risk of failure, is the reason for this.
Didn't even the great George Soros retreat after suffering astronomical losses in the Russian market?
"Do you really think Brexit will happen?"
The UK Treasury warned that if the UK withdrew from the EU, the pound's value could drop by more than 10 percent.
However, until just before the vote, the Remain camp remained dominant, and the stable trends in the foreign exchange and stock markets indicated that outcome.
If Brexit does not happen…
Josh chuckled.
"These otaku guys will probably go bankrupt."
***
After finishing class and on my way out, I received a call from Hong Kong.
"Nice to hear from you, Mr. Kang. This is Chase Southwell whom you greeted before."
The CEO of Golden Gate Asia called me? For a moment, I was so surprised I wondered if I heard it wrong.
"Oh, hello."
"It's been a while."
"Yes. Have you been well?"
We exchanged pleasantries as if we were close. There must be no reason for him to call me out of the blue. After a while, he got straight to the point.
"There seem to be alot of OTK Company's activities in the foreign exchange market."
I chuckled.
"It seems rumors have spread widely."
"I consider Mr. Kang a great investor. But I don't understand why you're making such reckless investments. Stop now. It's not too late."
OTK Company was facing huge losses in both foreign exchange markets. Liquidating now would cost billions.
"This is not from a partner but from your friend."
"…"
The legendary Asian investor Chase Southwell called me a friend! Kang Jin-hoo has truly come a long way.
I smiled inwardly, thinking so.
"Thank you for your concern. Well, as a friend, let me say one thing."
"What is it?"
"I intend to see this through. So please never stand on the opposite side of me. You'll understand the reason when the results come out."
It might sound absurd. Perhaps it could be seen as arrogance out of unwillingness to admit defeat.
However, I was sincere. At least I didn't want Golden Gate to suffer losses.
After a while, Chase's voice was heard.
[Wishing you good luck.]
TL/n -
The European Exchange Rate Mechanism (ERM) was introduced to reduce exchange rate variability and achieve monetary stability in Europe. It was part of the European Monetary System (EMS) and aimed to prepare European countries for the adoption of a single currency, the euro.
How ERM Works:
-> Central Rate: Each participating country's currency had a central exchange rate against the European Currency Unit (ECU), which was a weighted average of the participating currencies.
-> Fluctuation Bands: Currencies were allowed to fluctuate within a set margin around the central rate. Initially, this margin was ±2.25%, but some currencies had wider bands.
-> Intervention: Central banks intervened in the forex market to maintain their currency within the agreed bands by buying or selling their currency.
----
Example:
Let's consider the British pound (GBP) in the ERM:
Central Rate: Suppose the central rate was set at 1 ECU = 0.70 GBP.
Fluctuation Band: With a ±2.25% band, the GBP could fluctuate between 0.68425 and 0.71575 per ECU.
Intervention: If the GBP approached the upper limit (0.71575), the Bank of England would sell GBP and buy foreign currencies to bring it back within the band.
(GBP reaches the upper limit because the demand is high so the Bank of England sells GBP to fulfill the demand and stabilize the fluctuation. In the finance field the most basic thing you have to understand to the concept of Demand & Supply because they will decide the value.)
(For example, the demand for Gold is high but supply is less so the gold price is high but if the market is flooded with gold then it will fall.)
Real-World Example=> Of ERM
George Soros is famously known for his role in the 1992 currency crisis, often referred to as "Black Wednesday."
(To summarize => he short the British Pound and made 1 Billion dollar)
(By now you should already know what short and long mean as I'm trying to explain all the financial concept as they come)
Here's a summary of how he managed to "break the Bank of England":
Background: In 1990, the UK joined the European Exchange Rate Mechanism (ERM), which aimed to stabilize exchange rates by tying them to the German mark. However, the UK economy was weaker compared to Germany's, leading to high interest rates and economic strain.
Soros' Strategy: Soros believed that the pound was overvalued and that the UK would eventually have to devalue it or withdraw from the ERM. He began shorting the pound, which means he borrowed pounds and sold them, planning to buy them back at a lower price later.
Market Pressure: On September 15, 1992, Soros and other speculators aggressively sold pounds, causing its value to plummet. The Bank of England tried to defend the currency by buying pounds and raising interest rates, but these measures failed to stabilize the currency.
Outcome: On September 16, 1992, the UK government withdrew the pound from the ERM and devalued it. This led to a significant drop in the pound's value, and Soros made an estimated $1 billion profit from his short positions.