INTERNATIONAL FINANCIAL SYSTEM

The International Financial System: Case Questions and Answers



The International Financial System: Case Questions and Answers

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?

There are two main points of view regarding the financial success of George Soros. According to the first point of view, the success of Soros came from his gift of foresight of the forex markets (Investopedia 2009). Another says that in making important decisions, George Soros is using insider information provided by senior officials of the political and financial circles of the largest countries in the world (Woolley 2010). Soros has carried out a hedge fund named Quantum Fund NV, registered as an offshore company owned by the Netherlands on the Caribbean island of Curacao. It is the largest fund within the Soros controlled groups of funds.

Soros became famous after "Black Wednesday" September 16th 1992. It is believed that his income was more than a billion dollars on that day alone. Subsequently, Soros attempted to explain the great success referring to the theory of reflexivity of stock markets. According to this theory, decisions about purchases and sales of securities are made based on expectations of future price, and because expectations fall under a psychological category, it may be subject to informational influence (Qfinance.com 2010). The attack on the currency of a country consists of successive blows of information through the media and analytical products, combined with the real actions of currency speculators, loosening the financial market. In 2002, the Paris court found Soros guilty of obtaining confidential information for profit, and sentenced to a fine of 2.2 million Euros (Investopedia 2009).

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

Currency traders should have extensive understanding of the risks associated with forex market deals. Exchange rate risk is the uncertainty of the value of a currency that occurs when one currency is converted into another (Delaney 2010). This source of risk applies only if the investor acquires foreign assets denominated in a foreign currency. Avoiding such assets means the investor avoids this source of risk. However, because the individual may acquire shares in domestic firms with foreign operations or shares in mutual funds that make foreign investments, the individual still may indirectly bear exchange ...