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Soros the Story of a Trader

Soros the Story of a Trader

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Published by: AlternativeEconomics on May 03, 2012
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George Soros: story of one trader
 Like in every sphere of life, there are outstanding personalities at Forex, whose names went down inhistory. At the currency market, George Soros is one of the most successful traders in history. Hiscareer began from the establishment of the Quantum Fund in 1969 on Curacao (NetherlandsAntilles in West India). During the time of its existence, the Quantum Fund conducted a greatnumber of profitable speculative operations at Forex currency market. For example, on the spotmarket in 1996 only, the Fund received the profit equal to that of the annual income of McDonald’sCorporation. Though, the most money-making deal of George Soros is considered to be theoperation on the currency speculations at the British pound sterling in 1992, due to which within a period of one month a net profit of USD 2 billion was gained. Thanks to such success and the facts, by which it was caused by, George Soros got the reputation of "the man who broke the Bank of England."For such triumphant currency speculation, George Soros owes to the situation in the world in the90s. In 1979 on the initiative of Germany and France the European Monetary System (EMS) wasestablished. The EMS was targeted to maintain the stability of the currency rates of the Europeancountries- members of the System, and also to prepare for the currency integration. The initialmembers of EMS were Germany, France, Italy, the Netherlands, Belgium, Denmark, Ireland andLuxemburg. The mechanism of the currency rates maintenance (the European Exchange RateMechanism (ERM), which was the main purpose of the EMS, was grounded on the introduction of the European Currency Unit, ECU, which was a prototype of the today’s Euro (EUR). For everyEMS member, the central rate versus ECU was set, and also the currency rate limits (a corridor),within which the change in currency exchange rate was allowed. The members of the EMS wereobliged to maintain the rate of their national currency by any means under conditions of theagreement, or leave the System. The central rates of the countries- members of the EMS, under theterms of the treaty, could be changed, which had happened 9 times in a period from 1979 to 1987.In 1990, the Great Britain joined the EMS and the rate of the pound (GBP) was fixed at the level of 2,95 (DEM) with a permissible currency corridor ± 6%. By the middle of the 1992 thanks to theERM, a considerable decrease of the inflation tempo in European countries- members of the EMS,was reached. Nevertheless, the artificial maintenance of the currency rates in the limits of thecurrency corridor arose doubts of the investors. The situation got worse after the reunion of Westand East Germany in 1989. The weakness of West Germany’s economy brought to the incensementof the national outlay, which forced Bundesbank to issue more money. This policy brought toinflation, and Bundesbank reacted to this by uprising the interest rate. The high interest ratesattracted foreign investors, this, in its turn, caused an excess demand on the Deutschemark, andresulted in the growth of its rates. The Great Britain, being bound by the EMS agreement, was tomaintain its national currency rates within the fixed limits of the currency corridor versus theDeutschemark. The British economy at that time was destabilized; the unemployment rate of thecountry was high. The uprising of the interest rate after Germany in such conditions could onlymake the situation worse. But there were no other possibilities to strengthen the domestic currencyrate in the near term. At that time, George Soros and many other investors considered, that the GBwould not be able to maintain the domestic currency rate at the needed level, and it would haveeither to announce about its devaluation, or refrain from the ERM.George Soros took a decision to contract debts for the pounds (GBP), and to sell them for theDeutschemarks (DEM), and invest them in the German assets. As a result, almost GBP 10 billionwas sold. George Soros was not alone thinking in this direction, and many investors followed hisactions.

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