Finding a one-way bet: Rare but do exist

The savvy investor will always try to make an investment where the reward outweighs the risk. Is it possible to find an investment opportunity where you can only win and not lose? Yes. Rarely.

George Soros found one in 1992 when he famously bet against the pound because it had entered the ERM (European Rate Mechanism) at too high a level. He famously sold the pound short in a big way and made a risk free billion since there was no chance the pound was going to revalue. I spotted and exploited a similar situation in a very mini way in 1984.

The New Zealand economy was a real mess ( it looks to be going that way again!). They had balance of payment problems and in those days the NZ dollar was fixed and not yet floating like most major currencies. A currency devaluation was very likely. A prediction of 10% was expected. There was zero chance of a revaluation so that the only risk if they did not devalue was the loss of small commissions.

There was no internet and currency trading was a highly professional affair. There were currency futures for the majors which your broker could trade for you. For the currencies there was the interbank market of currency forwards which is not so popular any more. It was essential for businesses to hedge their exposure when importing and was not really for speculation. Nevertheless I saw an opportunity. I was living in England at the time. I used 2 small branches of major UK banks in the town where I lived. It was around the 11 July.

I went to see the manager at Barclays bank and asked if he would contact their main branch in the City of London to sell $NZ 200000 forward for me, and I explained why I thought NZ would devalue and how risk free and easy this was. Commissions and margins were fairly small for interbank forwards and I had over 10,000 pounds in my account. The manager did not see things my way and said he could not help me. I needed a different approach. I also had an account with the Midland bank. It was bought by HSBC and no longer exists. The next day I went to see the manager there,

“My grandmother in NZ died.” I told him. He was sorry to hear that but asked how he could help me. “She left me about $NZ 200,000 which I expect to receive fairly soon.” I told him. I then explained that it was widely expected the NZ dollar would devalue 10% and so I would lose money when it arrived.

I asked him to sell NZ $200,000 forward. This made sense to him and he agreed to try. The next day I got a call and a faxed copy of my 3-month forward contract to sell NZ $200,000. These contracts were tradeable so you did not have to wait the full three months before delivering the funds. On 17 July the NZ dollar was trading at 2.14 to the pound.

My contract was to sell NZ $200,000 for around 93,000 pounds. On the 18 July they devalued about 20%. The NZ dollar was now trading at around 2.62 to the pound. Its rate was allowed to float and has been doing so ever since. This meant that NZ $200,000 was only worth about 76,000 Pounds. I had made just over 17,000 Pounds ( about US$ 30,000) at the time.


I phoned the next day and the manager was happy I had such foresight and asked when the money would arrive. I explained that there was no grandmother or money for that matter. There was of course a legal contract against which I could borrow 76,000 Pounds in the spot market (immediate market) which could be delivered against the contract to receive 93,000 Pounds and making me a nice little profit (technically you are selling an offsetting 3-month forward), but the principle is the same. Obviously he wasn’t pleased but those were the days when customers put up the money and banks did the speculation. Nowadays with the internet everyone speculates. I also always wonder why Soros didn’t spot this one. Maybe he though the NZ dollar was too small for his grand trades. Somewhere sometime I do believe another one way bet will emerge.

Here at Macrotomi if we sense one we will let you know, and if we can’t find zero risk bets we continually strive to find investments with the lowest risk relative to the potential reward.