Lots of chat in the UK press today about bankers ‘shorting’ GBP last Wednesday/Thursday based on a leak of the mini-budget, and earning fortunes as a result. How does one ‘short’ a currency?
In: 0
‘Shorting’ some asset is to take a position that the value of that asset will fall, typically within a short period. For currencies, there are broadly (ELI5) two ways to do this.
1) Purchase a futures contract. Essentially that is a promise today that at some agreed upon time in the future, you will agree to exchange a certain currency for another currency at a certain exchange rate.
2) Borrow in the currency that you expect will fall in value, convert it to a foreign currency. For example, borrow 1 million pounds today, exchange it for 1.08 million USD. If the pound falls, then the value of that USD when converted back to GBP will net more than 1million pounds.
Latest Answers