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Speculative currency trading

Ever since I started understanding the little economics that I do know, I wondered whether it was possible to make money using currency (to be precise, speculative trading in currency). Currency changers have long been making money trading in currency, using different rates for buying and selling.

No, this post is about making money in the time dimension: Is it possible to make money by utilizing the fluctuations in the exchange rates? Ideally, the answer would be that it is impractical, that better returns shall be obtained with other investments. However, the roller coaster ride of the rupee vs the dollar has got me thinking about this again.

The rupee was at around 45 rupees to the dollar until at least August or September 2011. Now it is at around 53 rupees to the dollar as I write this article in January 2012. Which means that in a span of around 4-5 months, the rupee has been devalued by around 7 rupees to the dollar. Let us assume that I purchased a lot of dollars in August, say 1000. For this, I had to spend around 45000 rupees. Now, I sell those dollars, and I get 53000 rupees, a profit of 8000 rupees, or approximately 18% in 4 months. Further, the rupee is soon going to go back to the earlier levels of 45 rupees to a dollar in the next few months, say a year. Extremely lucrative markets exist for speculative trading in currency.

Now, I add a subversive element to the argument. Let us assume that someone closely associated with the government and with its workings has some vested interests. So, the government policies can be changed according to the wishes of this particular person. (I shall also oversimplify some of my arguments, just to make a point. I'm not going to nitpick.) Now, assuming that the government is corrupted thus, speculative trading in currency becomes easier. In fact, it no longer is speculative, because the all-important person is dictating the game.

Now, we move beyond small sums to much larger ones. If this person was to get a large amount of money in the market, (s)he would (I'm not being sexist here; women can be as much if not greater rouges than men) push the government to modify economic policy to allow foreign investment in the Indian market. By investing slowly, the person can ensure that the Indian markets rise, and the rupee falls to a lower exchange rate and that the markets rise. Now, the person withdraws suddenly, causing the markets to crash, and the rupee to be devalued again. In this case, the cycle would take a longer time, say a year. However, profits shall not be just due to trading the currency, but also in the Indian markets. So, the net return would be much higher than what is just by trading in currency.

This article, like many others in this blog, is written in jest. Read into it what you will.

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