Thursday, August 23, 2007
Can’t say I have any sympathy. It was a free money arbitrage situation which was used to create ridiculous amounts of leverage. When you gamble that way, you take your chances and if you aren’t smart enough to get out before the scam ends, you deserve to
unwinding now because large numbers of people are having to close out positions and thus repay their Yen denominated loans standard play was to borrow in Japan (which has had zero or near zero prime rates all decade) and then buy foreign denominated assets. When you unwind you have to convert your foreign currency back into Yen.That increased demand is driving up the price of the Yen. As the Yen goes up, you get into a classic vicious spiral - the higher the Yen is compared to when you borrowed, the worst the (non Yen) assets you bought with that loan are looking.A large enough rise in the value of the Yen can wipe out your gains entirely, or even convert them into losses.