7 Step Plan to Make Money Ruining a Developing Country
How to make money off of a currency devaluation.
- Have a large sum of money in a stable currency ($1 Billion for our purposes)
- Put this money into an overvalued foreign currency from a country that has recently undergone structural adjustment (financial liberalization, privatization, etc, etc) -currency boards, bolstering of exchange rates, etc will be helpful here
- At some point there may be a question of the government’s ability to pay back the IMF, a structural problem with demand or even a currency debt trap
- Purchase a hedging strategy (for our purposes, a put option)
- Pull your $1 Billion dollars out of the country
- Currency panic ensues; devaluation happens due to a combination of declining demand for money (possibly increasing money supply, in the case of monetization of the debt) and abandonment of currency boards
- Buy back $1 Billion Dollars of said currency, exercise put option
Money made on put option, assuming that the original exchange rate was 1:1, a 20% devaluation, a strike of 90% of the asset and the foreign currency denominated with the # symbol (values here are chosen for simplicity):
Purchase of devalued foreign currency:
$1,000,000,000*(#1/$0.8) = #1,250,000,000Sell for:
#1,250,000,000*($.09/#) = $1,125,000,000Before subtracting the cost of the put option, this is equal to:
$1,125,000,000 -$1,000,000,000 = $125,000,000
