Quantum Fund Case Study
The European Union – EU consists of 28 countries that participates in the world economy as one economic unit and partly operates under one official currency, the euro. England is one of the biggest members; however, instead of adopting the euro, they still keep pound sterling as their official currency. One of the reasons for keeping the pound can certainly be found in British pound attack in 1992 and Quantum fund is blame as the culprit. This paper contains 4 chapters which are aimed at presenting the sterling crisis and role of Quantum fund to this currency attack. 1. Background of the institutions and the event
1.1 Quantum Fund
Quantum fund was known as Soros Fund Management. The fund was founded by George Soros and his …show more content…
They kept low interest rates and cut income tax, particularly for those who had high income. This policy encouraged consumer spendings more than saving money. Moreover, at this time, there was a boom in the housing market. Consumer wealth and spending raise cause of the significant grow up of housing prices. The development over the long run trend contributed to inflation and a large current account deficit. It led England felt into Recession in 1990 (Tejvan, n.d).
From April 1970, Britain joined the European Economic Community (ECC) and signed commitment with EMS, but they decided not to join the exchange rate system of ECC. However, it was not until October 1990 that UK decided to join ERM with the assurance of the Government that will pursue an economic policy and currency to prevent fluctuations in the exchange rate between the pound and the currencies of other countries in the ERM with a pulsation rate of 6%. The British pound was locked into the German Mark at a central rate of 1 GPB = DM2.95 (Tejvan, n.d).
2. The drivers and the development of the …show more content…
A trader working for Soros realized the importance of the Bundesbank statement and told him their bet against the pound was likely to pay off. Soros told the trader they should “go for the jugular” and dramatically increase the size of the position. They went from a $1.5 billion to a $10 billion position and other hedge funds jumped in on the action as well. In order to get profit the Quantum Fund used the short-selling technique: buy dollars or imminent revaluated Mark, short selling devalued pound. According to the U.S. Securities and Exchange Commission (2015), short selling can be defined as “…the sale of a stock that an investor does not own (…). Investors who sell stock short typically believe the price of the stock will fall and hope to buy the stock at the lower price and make a profit”. As Europe slept, from anyone or any source, Soros borrowed billion pounds to sell out to the market. The Quantum Fund’s position exceeded $10 billion through shorting pound sterling. Other hedge funds got wind of the trade and the report from the Bundesbank and began copying this pattern, also borrowing and selling pounds. By the time, London markets opened for business British treasury officials started their day, tens billions of pounds had been sold, so it’s value was dangerously close to trading below the levels mandated by the ERM. In an effort to discourage speculation, a raised interest rates