ASSIGNMENT ON

GEORGE SOROS AND HIS SPECULATIVE ACTIVITIES

SUBJECT- INTERNATIONAL FINANCE

SUBMITTED BY

DEBOJYOTI NASKAR

2019MBA007

PGP 2019-21
How George Soros Made the Perfect Speculation?

On September 16, 1992, George Soros made over $1 billion in profit in just one day. It was a
legendary trade that would go down in financial history. Soros did this by making a very big
speculation against the British pound.

At the time, the pound was pegged to the German currency through a fixed exchange rate known
as the European Exchange Rate Mechanism (ERM). It was a precursor to the euro currency.
With the ERM, exchange rates between participating European currencies were not set by supply
and demand. Instead, governments bought or sold their respective currencies to keep them within
acceptable limits.

By 1991, it was vividly clear to everybody that the pound was overvalued at its fixed rate within
the ERM. The Bank of England’s ongoing intervention was the only thing propping it up. In
spite of that, the market believed that the Bank of England could continue the charade
indefinitely. Soros viewed things in a different manner. If he could break the Bank of England’s
will, it would pressurize them to get rid of the pound’s fixed exchange rate. Soros would make a
massive gain in that case. Soros planned to do this by shorting the pound. In other words, he’d
speculated that the pound would weaken.

Soros borrowed as many pounds as he could. Then he sold those pounds to the Bank of England
for German Deutsche marks at the fixed rate. If the pound weakened, he could convert his
Deutsche marks back into pounds at a much more favorable rate, cover the amount he had
borrowed, and pocket the huge difference. At the same time, his downside was limited because
the pound was obviously overvalued. The Bank of England’s willingness to intervene was the
only thing holding it up. There was very little chance the pound would strengthen on its own.
Therefore it was a low-risk, high-reward play. In many ways it was the perfect speculation.

On the morning of September 15, 1992, Soros’s hedge fund began to enormously short the
pound. By the end of that very day, the Bank of England had already bought over 600 million
pounds in a useless effort to defend the currency. But Soros was selling pounds quicker than the
Bank of England could purchase them. By the next morning, the British government was in a
total panic. It raised interest rates from 10% to 12%, hoping to cauterize the wound. But Soros—
smelling desperation—continued selling pounds and pressuring the fixed exchange rate.

Other hedge funds caught the air of what was happening. They started to short the pound, too. It
was a financial feeding frenzy, like a pack of wolves devouring a fallen antelope. That very
evening, by 7 p.m. latest the pressure was too much for the Brits. The government had to
intervene and announced that the UK was leaving the ERM and abandoning the fixed exchange
rate.

The pound had collapsed. Soros had shattered UK’s monetary policy. He had made over a billion
dollars in profit in just one day.
1992 September was a month which the international money managers won't easily forget.
Especially George Soros, the legendary chairman of the Quantum group of funds. Soros and
clients of his four Netherlands Antilles-domiciled pools cleared a cool $ 1.5 billion in just one
month as a result of the upheaval in Europe's markets. Nor is that the entire Soros crowd has
made this year: Between the end of August and early October the new asset value of his flagship
$ 3.3 billion (assets) Quantum Fund rose 31% and it is up 51% year-to-date. As of mid-October
his assets under management had buffed up to $ 7 billion.

There were other big gainers in the currency turmoil that toppled the pound sterling, the lira and
other soft European currencies and humbled the central banks of Europe. The big gainers
consisted of Bruce Kovner of Caxton Corp. and Paul Tudor Jones of Jones Investments.
Kovner's funds made an estimated $ 300 million, increasing assets to about $ 1.6 billion; Jones'
funds were up some $ 250 million, to $ 1.4 billion in assets.

The month of wild trading and sheer exuberance that havocked the European Exchange Rate
Mechanism was also merry times for the leading U.S. banks with big foreign exchange
operations, especially Citicorp, J. P. Morgan, Bankers Trust, Chemical Banking, Chase
Manhattan, BankAmerica and First Chicago. Together, in quarter three, they netted before taxes
over $ 800 million more than what they normally earn in a quarter from trading currencies.

Europe's Exchange Rate Mechanism was set up in 1979 by the then-members of the European
Economic Community to keep the various European currencies relatively stable against one
another. Relatively narrow fixed trading ranges were established within which the prices of 11
European currencies were supposed to fluctuate. But the system could work only if the various
countries coordinated their economic policies. If one nation had, say, higher inflation than
another, there would be great strain on the system. Differences in interest rates also would strain
the system. When differences in interest rates and inflation rates among the 11 got out of line,
the central banks had to intervene to buy and thus support the weakening currency against
speculators and currency hedgers.

September 16, 1992, is also known as the Black Wednesday, was the day speculators forced the
British government to pull the pound from the European Exchange Rate Mechanism (ERM).