Hedge fund managers are said to have been making huge profits this week by shorting the pound as it plummeted to near parity with the US dollar, Yahoo Finance reports.
Sterling sank to just $1.0327 in early Asia trade on the morning of September 26 but has since rallied to around $1.11. But what is shorting and how can traders make money by doing it?
Yahoo Finance breaks down what is going on in the currency markets:
Shorting
Short selling is when investors speculate on the falling price of a stock or other security price. They do so by borrowing shares in a firm that they believe will decrease in value.
They then sell these borrowed shares to buyers at the current market price.
They are betting that the price will then fall and that they will be able to buy back the borrowed stock at a discounted price before they have to return it. The profit they make is the difference between what they made for selling the stock and the price they paid for buying it back.
Most short selling reportedly happens with stocks and shares, but it is also possible to short sell on other financial markets such as currency trading markets.
The pound fell against the dollar after chancellor Kwasi Kwarteng announced unfunded tax cuts as part of last week’s controversial mini-budget.
Shorting the pound
Shorting the pound means taking a position that will make you a profit when the value of the pound falls.
Traders do this on foreign exchange markets, or Forex, where currencies are converted into other currencies.
Forex is traded in pairs of different currencies. So for example, you could trade a pair with the pound as a base currency (the first currency) and the US dollar as a quote currency (the second currency).
Traders who made money would reportedly have sold pairs with the base currency GBP before the crash, or early on in the fall of the pound against the dollar.
It is also possible to short currency pairs using other financial instruments called derivatives. These effectively allow you to bet on the movement of the underlying asset without owning it.
This sort of trading can make markets very volatile, especially when lots of people pile into the same trade.
Currency speculation
Essentially, speculation in the world of finance refers to taking a risky bet. Speculators conduct financial transactions that have a risk of losing value but also have a chance of significantly gaining value.
Investors are considering how the price of the thing they’ve bought will change and trying to make money from that change. Speculators are not looking to actually buy the product outright but rather to make money from the fluctuations in the market.
In currency speculation, for example, the investor will be looking to buy a certain currency so that they can sell it at a higher price in future. They are not seeking to buy it so they can pay for an import.
Parity
There has been a lot of discussion about parity between the British pound and the US dollar in recent days. Parity simply means the dollar and the pound being the same price.
Currently, it costs around $1.11 to buy £1, however, if the currencies reach parity $1 will be worth £1.
Source: Yahoo Finance
Hedge fund managers are said to have been making huge profits this week by shorting the pound as it plummeted to near parity with the US dollar, Yahoo Finance reports.
Sterling sank to just $1.0327 in early Asia trade on the morning of September 26 but has since rallied to around $1.11. But what is shorting and how can traders make money by doing it?
Yahoo Finance breaks down what is going on in the currency markets:
Shorting
Short selling is when investors speculate on the falling price of a stock or other security price. They do so by borrowing shares in a firm that they believe will decrease in value.
They then sell these borrowed shares to buyers at the current market price.
They are betting that the price will then fall and that they will be able to buy back the borrowed stock at a discounted price before they have to return it. The profit they make is the difference between what they made for selling the stock and the price they paid for buying it back.
Most short selling reportedly happens with stocks and shares, but it is also possible to short sell on other financial markets such as currency trading markets.
The pound fell against the dollar after chancellor Kwasi Kwarteng announced unfunded tax cuts as part of last week’s controversial mini-budget.
Shorting the pound
Shorting the pound means taking a position that will make you a profit when the value of the pound falls.
Traders do this on foreign exchange markets, or Forex, where currencies are converted into other currencies.
Forex is traded in pairs of different currencies. So for example, you could trade a pair with the pound as a base currency (the first currency) and the US dollar as a quote currency (the second currency).
Traders who made money would reportedly have sold pairs with the base currency GBP before the crash, or early on in the fall of the pound against the dollar.
It is also possible to short currency pairs using other financial instruments called derivatives. These effectively allow you to bet on the movement of the underlying asset without owning it.
This sort of trading can make markets very volatile, especially when lots of people pile into the same trade.
Currency speculation
Essentially, speculation in the world of finance refers to taking a risky bet. Speculators conduct financial transactions that have a risk of losing value but also have a chance of significantly gaining value.
Investors are considering how the price of the thing they’ve bought will change and trying to make money from that change. Speculators are not looking to actually buy the product outright but rather to make money from the fluctuations in the market.
In currency speculation, for example, the investor will be looking to buy a certain currency so that they can sell it at a higher price in future. They are not seeking to buy it so they can pay for an import.
Parity
There has been a lot of discussion about parity between the British pound and the US dollar in recent days. Parity simply means the dollar and the pound being the same price.
Currently, it costs around $1.11 to buy £1, however, if the currencies reach parity $1 will be worth £1.
Source: Yahoo Finance