Abstract

Financial disasters to hedge funds, bank trading departments and individual speculative traders and investors seem to always occur because of non-diversification in all possible scenarios, being overbet and being hit by a bad scenario. Black swans are the worst type of bad scenario: unexpected and extreme. The Swiss National Bank decision on 15 January 2015 to abandon the 1.20 peg against the Euro was a tremendous blow for many Swiss exporters, but also Swiss and international investors, hedge funds, global macro funds, banks, as well as the Swiss central bank. In this paper, we discuss the causes for this action, the money losers and the few winners, what it means for Switzerland, Europe and the rest of the world, what kinds of trades were lost and how they have been prevented.

Highlights

  • Not Clockwork: A Short History of the Short-Lived Swiss Franc PegThe objective of this paper is three-fold. We describe the events surrounding the decision by the

  • Financial disasters to hedge funds, bank trading departments and individual speculative traders and investors seem to always occur because of non-diversification in all possible scenarios, being overbet and being hit by a bad scenario

  • We describe the events surrounding the decision by the

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Summary

Not Clockwork: A Short History of the Short-Lived Swiss Franc Peg

The objective of this paper is three-fold. We describe the events surrounding the decision by the. The Swiss National Bank (SNB) pegged the Swiss franc (CHF) to the euro at 1.20 in 2011, thereby tracking the euro in its moves against all other currencies. (ECB) toward quantitative easing (QE), a return of the Eurozone (EZ) crisis in the name of Greeceor Russia-related uncertainties, effectively could put pressure on the exchange rate and, require it to expand its balance sheet even more by buying a lot of euros. Instead of printing money directly, the central bank committed to buying euros in order to weaken the CHF This type of policy may be tempting for small countries with an open economy, such as Switzerland. The HKMA was willing to expand its balance sheet massively, including by purchasing local equity Both Hong Kong and Switzerland have small economies with the peg against a much larger economy. Chuptka [5], following Peter Schiff of euro Capital, argues, as we to do, that unemployment is the key problem

The Currency Moves
Review of How to Lose Money Trading Derivatives
Counterparty default
Speculation
Forced liquidation at unfavourable prices
Misunderstanding the risk exposure
Forgetting that high returns involve high risk
How overbetting occurs:
The Folly of the Misleading Value at Risk Measure
Subadditivity
Homogeneity
Translation invariance or risk-free condition
Losers and How It Affected Them
Banks and Hedge Funds
What Types of Traders Lost Money
Short strangles and straddles
10. Mortgage Losses
11. From Quantitative Easing to Financial Unease?
Findings
12. Final Remarks

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