Rebirth of the Financial Overlord

Goliath's tone was full of confidence. He knew in his heart that Germany just wanted to teach Italy a lesson, but he didn't want the lira to collapse. This would not do Germany any good. On the contrary, with the delicate relationship between Italy and Germany , it would only be bad for Germany if the lira collapsed like the mark.

At this time, I went to Schlesinger to borrow money, and I would definitely be able to borrow it.

However, Ciampi does not have much confidence in this, not because he has no confidence in going to Germany to borrow money at this time, but because he really has no confidence in Lira.

As for the reason, Qianpi didn’t know, he just felt uneasy in the dark, a bit like the sense of trading developed by traders, but not entirely. If he had to say a closer reason, it was probably because Qianpi was in the financial field. Immersed in many years, with the instinct and intuition developed with rich experience.

Of course, just because Ciampi didn't know, it didn't mean that other people didn't know.

As an asshole, if Shen Jiannan could sense Qianpi's uneasiness now, he would definitely give a thumbs up for the richest and most chaotic central bank governor.

The operation of the European Exchange Rate Mechanism is based on the intervention of the central banks of various countries in the exchange rate to maintain a limited range.

Each exchange rate mechanism participating currency is assigned a target exchange rate against the ECU, known as the central ECU exchange rate for that country's currency. The ratio of any two ECU central exchange rates is defined as the bilateral central exchange rate between two participating countries. Aggregating all bilateral central exchange rates forms the ERM parity fence.

Each participating country is responsible for maintaining its currency within the grid, allowing fluctuations of a predetermined magnitude. The fluctuation range of participating countries' currencies is ±2.25%, but some currencies are allowed to float within a larger range of ±6%. For this mechanism to work effectively, members should coordinate each other's monetary and fiscal policies and implement an orderly economic structural reform.

Member states should also agree to direct intervention in foreign exchange markets in order to maintain their currency's position in the ERM.

In the past ten years since the birth of this exchange rate mechanism, it has operated well, and the central bank no longer has to worry about the harm caused by violent fluctuations in the exchange rate. It is just like automatic cruise, saving worry and effort.

But that's a thing of the past.

In the beginning, the European Economic and Monetary System established a new currency unit, the Ecu. This monetary unit originates from a currency-weighted average, weighted by 1979 GDP, based on the 1979 EEMS member currencies. The composition of the ECU is periodically adjusted to reflect changes in the relative GDP of member countries.

The composition of the ECU changes when new currencies are incorporated into the European Economic and Monetary System.

It seems that everything is perfect.

It's just that there is a small problem in it.

The problem is that under the European Exchange Rate Mechanism system, countries have different economic levels, so the interest rates of countries are also completely different.

Therefore, this small problem means that you can make a profit without losing money.

That's right, it's a steady profit.

This is a very ridiculous little question. Anyone who has paid enough IQ taxes knows that in the field of investment, there has never been a steady profit. When a person tells others that he can guarantee a steady profit without loss, either he is God or he is a liar.

But as the saying goes: God is trustworthy, sows will climb trees.

If someone could make a steady profit without losing money, the financial market would have ceased to exist long ago.

However, the difference in interest rates between countries does provide smart speculators with an opportunity to make a profit without losing money. This opportunity is later known as the convergence trade.

What is a Convergence Transaction?

This is a very complicated thing.

Roughly it can be interpreted as looking for securities that are price-mismatched relative to other securities, longing low-priced ones and shorting high-priced ones. Generally speaking, there are four types of transactions: the convergence of sovereign bonds; the convergence between new and old government bonds; and the convergence of securities markets.

In short, it can be understood that the common currency unit is the Ecu, but there are different interest rate differences in various countries. This difference means that traders and investment managers are free to invest in currencies with the highest returns. The national currency of the European exchange rate mechanism, without worrying about the exchange rate risk, because the exchange rate of the currency within the European Community is fixed.

Why do you say that?

It is still the exchange rate mechanism of the European Community. When the currency of a member state rises or falls to the floating margin, the central bank of that country has the responsibility to stabilize the exchange rate in accordance with the operation of the exchange rate mechanism.

One of the important factors promoting capital inflows is that international investors increasingly believe that ERM member countries are in the process of moving closer to the European currency, the ECU, which in this case is conducive to the high-yield ERM Currency interest rate differentials will increasingly overestimate the real risk of exchange rate depreciation.

It is conceivable that there is no need to worry about speculation on exchange rate changes, which almost means that there is no loss. Anyway, the central banks of various countries will pay for it.

The favor for convergent deals can be seen almost everywhere. One securities portfolio manager claimed that it was viewed as the equivalent of government-sponsored hedging. The ERM has fueled the astonishing popularity of a new class of money market mutual funds that trade high-interest short-term securities of foreign governments.

As a securities portfolio manager said in trading: Since you can get higher returns from Spanish or Italian government bonds without taking compensatory risks, why bother to pay attention to the returns on West Deutsche Mark government bonds? Woolen cloth?

So the ERM fueled the astonishing popularity of a new class of money market mutual funds that traded in high-interest short-term securities of foreign governments.

Morningstar estimates that between 1989 and 1992, these funds attracted more than $20 billion in investor capital. The main securities investment behavior of these funds is convergence trading. As for the overall size of the market position, the International Monetary Fund has calculated that the total size of the convergent trade may reach 300 billion US dollars.

This is why Ciampi has always been worried about the electronic nomads, although he does not know the actual amount of convergent transactions conducted by global capital through the computer Internet.

ring ring ring——

At 6:30 in the morning, the harsh phone rang in the early morning, which disturbed Shen Jiannan who was sleeping in the dreamland. He reached over Yulia's chest, which was in the way, and grabbed the satellite phone on the bedside.

Boss. The Bank of Italy just announced that the discount rate will be raised to 12%. Should we continue to open positions as planned?

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