The international financial system

Soros

International Currency Markets

How did George Soros make money in the international currency markets? Was it something to do with his understanding of the international financial system, or just good luck?

Hungarian-born George Soros started making a name in financial speculation in the late 1960s, when he started investing with his own fund known as the Quantum Fund. Soros's speculations began making big news and he was able to gather a rather large following. The bulk of his fortune came from attacks on major currencies. For example, he was able to off major attacks on the currencies of Great Britain and Italy by speculating against them. Soros would bet against the currencies on the exchange rate market in a big way. The news of Soros's moves would also gather a lot of publicity that furthered his cause. Once the market knew that Soros had bet against these countries then many investors became panicked and followed Soros's led.

On Black Wednesday, September 16, 1992, Soros bet $10 billion that the British pound would fall. This was a move that he had already practiced with Italian lira, which proceeded to devalue. Then he made a similar move with respect to the British pound, assuming that it would decline against other currencies. Within twenty four hours Soros had made over one billion, and he eventually made over two billion on the entire deal. This caused a great deal of economic uncertainty for the entire country and the Bank of England was actually forced to withdraw the currency out of the European Exchange Rate Mechanism Soros came to be known as "the Man Who Broke the Bank of England."

Sorors was partly clever and partly lucky. Although Soros proved to be a good investor, he was taking a big risk by investing so much in one currency swap. There is a lot of risk in such a move. Furthermore, he was also at least partly lucky that he was able to manipulate the market through his actions. When Soros started making the moves, this created a lot of publicity that made others move with Soros. If the other investors had not played along, then it is unlikely that the market would have moved in Soros's favor to the extent that they did.

Are there any risks involved in the international currency markets that currency traders should be aware of? Yes or no.

International currency trading on the foreign exchange market, which is usually known as "forex" or "FX," is the largest financial market in the world. Compared to the measly $22.4 billion a day volume of the New York Stock Exchange, the foreign exchange market looks absolutely ginormous with its $5 trillon a day trade volume. Placing a trade in the foreign exchange market is simple: the mechanics of a trade are very similar to those found in other markets (like the stock market), so if you have any experience in trading, you should be able to pick it up pretty quickly (Baby Pips, N.d.).

The object of forex trading is to exchange one currency for another in the expectation that the price will change, so that the currency you bought will increase in value compared to the one you sold. The largest center where currency trading takes place is London. A smaller percentage is handled in New York. Hong Kong and Singapore also have small trading centers (Delaney, 2008). Trading from one center to another overlaps so that transactions can be completed 24 hours a day, 5 days a week.