Why will the dollar rally?

[Jimbo]

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who made the bad bet in your opinion? i'm betting for goldman sachs not posting 1 Q of negative earnings from now till end '08.


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Even though you didn't ask me you made the best bet. Like taking candy from a baby.

Jimbo

[Orlando Salazar]

of course u are, goldman won't fail in this environment.

[DcifrThs]

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who made the bad bet in your opinion? i'm betting for goldman sachs not posting 1 Q of negative earnings from now till end '08.


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Even though you didn't ask me you made the best bet. Like taking candy from a baby.

Jimbo

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yea i was pretty sure about that. goldman is a powerhouse.

i'm less sure about the gold bet i made w/ gonebroke2. i'm already out some loot to mr.now on gold (owed to him on december 18th i think)

i bet that gold wouldn't hit $1k between now and july 2008 (or june i forget which).

bad things: 1) uncertain environment, 2) inflationary pressures, 3) increasingly pension funds are allocating $ to gold

good things for me: 1) not more than 1 or 2 25bp cuts coming in the next year in all likelihood.

a run up to 1k would be huge and i'm still ok w/ my bet but far less so than the goldman bet.

Barron

[Jimbo]

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a run up to 1k would be huge and i'm still ok w/ my bet but far less so than the goldman bet.


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Buy gold futures at a strike price of $1000 using whatever amount you bet. This not only hedges your bet but if you were very very wrong you will make a killing. [img]/images/graemlins/smile.gif[/img]

Jimbo

[DcifrThs]

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a run up to 1k would be huge and i'm still ok w/ my bet but far less so than the goldman bet.


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Buy gold futures at a strike price of $1000 using whatever amount you bet. This not only hedges your bet but if you were very very wrong you will make a killing. [img]/images/graemlins/smile.gif[/img]

Jimbo

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yea but my bet isn't for a ton. gold futures would bring me a ton of long exposure along w/ my hedge.

i don't wanna make that bet.

Barron

[Jimbo]

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yea but my bet isn't for a ton. gold futures would bring me a ton of long exposure along w/ my hedge.


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It appears I wasn't specific enough. OK, buy December $60 call options for 68 cents each on NEM (in lots of 100). $68 per contract plus commission of about $20, IIRC you bet $100, only buy 1 so you will have less than $90 invested. These expire on Dec 21st 2007. If gold goes anywhere near $1000 they should be worth around $6.50 at a minimum (times the 100 shares they represent) you then make an easy guaranteed profit, and the most you can lose is your initial investment which will then be reimnbursed by winning the bet.

Jimbo

[DcifrThs]

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yea but my bet isn't for a ton. gold futures would bring me a ton of long exposure along w/ my hedge.


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It appears I wasn't specific enough. OK, buy December $60 call options for 68 cents each on NEM (in lots of 100). $68 per contract plus commission of about $20, IIRC you bet $100, only buy 1 so you will have less than $90 invested. These expire on Dec 21st 2007. If gold goes anywhere near $1000 they should be worth around $6.50 at a minimum (times the 100 shares they represent) you then make an easy guaranteed profit, and the most you can lose is your initial investment which will then be reimnbursed by winning the bet.

Jimbo

[/ QUOTE ]

how well do options on NEM track the value of gold? i'm assuming pretty highly.

thats a good idea actually then since i could just buy the calls in a very close to actual exposure and hedge my bet. (the overall bet was for more than $100) so that is a good idea.

i have to think about how strongly i feel about the bet overall and see if/how much i want to hedge.

thanks for the idea though, its a good one.

Barron

[tolbiny]

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first off, what does exporting w/ relative ease have anything to do w/ that? if it is a tanker of say american produced liquid or a box of american sheeps wool it still only depends on pricing considerations.

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Elasticity.

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it also would depend on the degree to which the exporting firm has already hedged away currency exposure.

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Why would this matter to the prices they decide to charge? It would certainly matter to their overall bottom line, but if the can increase both their total sales and gain from the exchange rate they will likely do so regardless of their hedging.

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now as to your first one, there needs to also be some qualifiers there in terms of export prices. the main one being the tradeoff between three things a) the elasticity of demand for the good/service being exported b) the market share of the exporter/overall market size and c) the margin on the good/service being exported.

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I was being overly simplistic, but its doubtful that a company would find it necessary to cut their prices by the full amount of the lost currency exchange to approach their optimal profit lines. So the 500E TV won't suddenly bring in an extra 100$ (from the example) but its unlikely that they will drop their prices all the way to 420E (or whatever the correct % drop would be to fully compensate for the new exchange rate).

[DcifrThs]

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first off, what does exporting w/ relative ease have anything to do w/ that? if it is a tanker of say american produced liquid or a box of american sheeps wool it still only depends on pricing considerations.

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Elasticity.

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i'm clearly lost here. could you expand a little bit more? i.e. an example? thanks.

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it also would depend on the degree to which the exporting firm has already hedged away currency exposure.

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Why would this matter to the prices they decide to charge? It would certainly matter to their overall bottom line, but if the can increase both their total sales and gain from the exchange rate they will likely do so regardless of their hedging.

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true, i was just thinking of other factors that would play into a firms decision to change export prices. my point was that a firm that hedges away their currency exposure would be less likely to move their export prices around given changes in currency all else equal. do you think that claim is wrong? if so, why?

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[ QUOTE ]

now as to your first one, there needs to also be some qualifiers there in terms of export prices. the main one being the tradeoff between three things a) the elasticity of demand for the good/service being exported b) the market share of the exporter/overall market size and c) the margin on the good/service being exported.

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I was being overly simplistic, but its doubtful that a company would find it necessary to cut their prices by the full amount of the lost currency exchange to approach their optimal profit lines. So the 500E TV won't suddenly bring in an extra 100$ (from the example) but its unlikely that they will drop their prices all the way to 420E (or whatever the correct % drop would be to fully compensate for the new exchange rate).

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right, but you're still quoting in terms of euros when i believe the price is quoted in dollars and simply translated to euros for the purchasing company. you didn't comment on that at all. what is your impression of that?

do domestic firms price in domestic currency or foreign currency? my impression and what makes the most sense to me is that domestic firms (for the most part) price in their own currency (well, let's stick w/ the US here b/c commodity & oil exporters etc. obviously don't).

Barron

[tolbiny]

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i'm clearly lost here. could you expand a little bit more? i.e. an example? thanks.


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I wrote poorly originally, try to clear it up now.

I make wooden chairs in the US that I sell in Europe, I buy lumber in $ and sell in E. My lumber suppliers sell their lumber in $ and pay their costs in $. When the dollar weakens my suppliers costs and profits stay about the same but my profits go through the roof either by increasing my market share by lowering costs or taking the exchange rate bonus to the bank. My suppliers would love to get in on this, the easier it is to export their good to Europe the easier it is for them to start supplying my competitors there and start reaping the benefits or larger market share or high exchange rates, to counter this I (the chair manufacturer) must pay more for those commodities here to compete with the Euros from my competitors.

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my point was that a firm that hedges away their currency exposure would be less likely to move their export prices around given changes in currency all else equal. do you think that claim is wrong? if so, why?


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I can see how if their hedge was tied to their production then it would influence their decisions, but they could also have hedges where it would influence their decisions very little. I guess I can see either happening depending on the structure of the hedge.

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right, but you're still quoting in terms of euros when i believe the price is quoted in dollars and simply translated to euros for the purchasing company. you didn't comment on that at all. what is your impression of that?

do domestic firms price in domestic currency or foreign currency? my impression and what makes the most sense to me is that domestic firms (for the most part) price in their own currency (well, let's stick w/ the US here b/c commodity & oil exporters etc. obviously don't).

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It doesn't matter does it? It just their price V the prices of their competitors.