This paper was written by Zhong Shi at the behest of Zhong Shi.

In the paper, Zhong Yi explained in detail the uneven development of various European countries, and the fact that the German economy implemented a high interest rate policy in order to suppress the inflation rate and forced other countries to adopt corresponding interest rate policies.

In particular, this paper explains in detail how hedge funds operate in different markets to maximize profits, especially in the stock market, bond market and other interest rate futures and options, which has opened the eyes of the international academic community.

In particular, the long-short position strategy, arbitrage strategy, circulation strategy and other means are eye-opening to the academic community, these professors who do research in the ivory tower are all studying economic theories on weekdays, and they are not as good as practitioners fighting on the front line in terms of application. When they see that hedge funds still have so many tools, many realize that today's financial markets are far more complex than they think.

Zuihou, who wrote the paper, also specifically pointed out that the currency crisis is far from stopping, and even if the franc has recently successfully fended off the attack, there are still great risks in the long run. In addition to the franc, several European currencies will be attacked, notably the Swedish krona.

This kind of prophetic wording is very rare in serious academic papers, but no one in the international academic community is thinking to accuse it, and everyone is watching. Will this currency crisis be like the one predicted in this paper, and eventually the currencies of some countries will also depreciate?

The paper also caused an uproar among hedge funds, and these professionals are also highly trained in economics and have a clear understanding of the authenticity of the operational strategy part of the paper. At first, they thought it was revealed by insiders, but after finding out the details of the author, they found out that this Louis . They were surprised that Zhong was just a PhD student at the university.

However, many hedge funds quickly waved an olive branch to Zhongyi, intending to recruit him after he graduated with a doctorate, and even some small hedge funds gave the chief strategist promises, but Zhongyi rejected them one by one.

You know, it's very difficult to get into a hedge fund. It's even more demanding than entering an investment bank. Investment banks in the U.S. are in the top 15 U.S. universities (generally private universities) every year. Berkeley, California, is the only public university that admits a very small number of outstanding graduates to investment banking, and only good analysts who have been honed and grown up in investment banking are likely to enter large hedge funds.

The Swedish government reacted quickly, and the Riksbank issued a statement in mid-October in which the Riksbank claimed to have sufficient foreign exchange reserves to deal with attacks on international travel. And announced that it would seek emergency assistance from the IMF (International Monetary Fund) if necessary. In order to ensure the stability of the value of the krona.

Meantime. The Riksbank announced that it will consider raising the overnight lending rate and rediscount rate of banks in the near future, fundamentally increasing the cost of borrowing capital from international investors. Together with foreign exchange reserves, the krona is protected.

However, the statement did not discourage the intention of international funds, but made them more convinced that the Riksbank was a manifestation of the strong internal and external strength.

The battle of the Swedish krona was on the verge of breaking out.

Naturally, the paper was published after Jongshi successfully exchanged all the funds for Swedish krona. After all, there are not many large commercial banks in the Swedish market, and the cost of borrowing will increase a lot when the rediscount rate increases.

The main profit model of commercial banks is to absorb deposits, then lend loans, and make profits by taking advantage of the interest rate difference between them, so there is not a lot of liquid capital left in commercial banks. When there is a large amount of foreign exchange funds that need to be exchanged, commercial banks will use those valuable bills or securities to borrow money from the central bank to generate the interest rate, which is the rediscount rate. As for the discount rate, it is an interest rate generated when an individual or enterprise is in urgent need of liquidity, and mortgages the corresponding valuable notes or securities to the bank.

The Riksbank's statement did not dissuade speculative funds from shorting the krona, and these funds were soon frequently lent to Swedish commercial banks and then sold on the foreign exchange market.

In response to this situation, the Riksbank quickly reacted by raising the rediscount rate, even raising it to 500% at one point, which means that commercial banks must lend out krona at a higher figure than 500%, which means that the interest rate on these krona loans is 1.38% a day, and 41.67% interest is paid in a month.

Naturally, this rediscount rate has seriously damaged the interest rate market and is unlikely to last long, but in order to curb short-term international capital speculation, the Swedish government has to do the same.

At present, there are only two ways for international speculative funds, led by hedge funds, to stop the loss and exit the market, and the other is to continue to sell the krona until the Riksbank announces that it will abandon the peg foreign exchange system and let the krona float freely in the market.

The first way is to pay part of the interest, the second way is a bit more complicated, if the attack on the Swedish krona is ineffective, the longer it lasts, the greater the cost of the capital, and if the Swedish krona eventually floats freely, but not to the corresponding extent, the capital will still end up losing.

This is the level at which the return from the depreciation of the krona is the same as the cost of short-term borrowing.

Arguably, the second option is much riskier than the first, but hedge funds, which have tasted the huge sweetness of the lira and the pound, simply don't care about the cost of borrowing, continue to borrow Swedish krona in the market, and then sell short in the foreign exchange market.

This is the most primitive way, and it is also the most effective way, especially when the market shorts are extremely strong and concerted.

Zhong Shi also thought about preparing to short a Swedish krona in the foreign exchange futures market, but several large commodity exchanges simply did not have similar currency varieties, and even if there were, because the market had a psychological expectation of the depreciation of the European currency, the related counterparties and trading volume also shrank.

As for foreign exchange options, since the appearance of that paper, there are a large number of options similar to short selling Swedish krona in the over-the-counter market, but no opponent dares to make similar bets, the lessons of the pound and the lira are still in the ears, and the top priority of these commercial banks is to avoid risks, selling currencies such as Swedish krona, Danish krona and even Swiss francs or assets denominated in them in the market.

These moves by commercial banks have further burdened the Riksbank.

In late October, Sweden's finance minister made a statement in the media about sticking to the exchange rate while looking around for capital to settle the surging sell-off in the market, but the attack on the Swedish krona did not stop. What made him despair the most was that the hot money invested in the stock market also began to flow out at this time, and as the stock market fell, an economic recession would be inevitable. He could even imagine a chain reaction of panic among the people, followed by a run on the banks, and then the bankruptcy of financial institutions.

Sure enough, soon a commercial bank declared bankruptcy, first one, and then more banks disclosed that the amount of non-performing assets was huge, that it was insolvent, and that it was ready to seek bankruptcy protection from the government.

For example, investors in Sweden often borrow funds in the form of foreign currencies when borrowing, because the interest rate of foreign currencies is lower than the interest rate of krona, and because of the fixed foreign exchange system, the loss of the exchange rate is basically negligible, and the commercial banks of Sweden also borrow cash from foreign commercial banks and then lend to customers in order to avoid the risk of foreign exchange. Therefore, when the krona was attacked, foreign lenders began to shrink their credit lines when they realized the risks of the Swedish commercial bank, and the Swedish commercial bank had to ask customers to repay the loan early or convert the krona into the local currency, that is, sell the krona; On the other hand, it is difficult for repayers to get enough kroner from the market at this time (commercial banks are reluctant to hold it because of the expectation of krona depreciation), and the high cost of depreciation has led to a sharp increase in the loan losses of Swedish commercial banks under such circumstances, and many Swedish commercial banks have been forced to declare bankruptcy under such circumstances.

Finally, on November 19, 92, after spending more than 200 billion kroner (about 35.8 billion US dollars) in intervention, Sweden was forced to abandon its relatively fixed exchange rate policy that it had adhered to for 120 years, allowing the Swedish krona to float freely, and the exchange rate of the Swedish krona against the US dollar in the foreign exchange market fell by 6.63% on the same day. By November 30, the Swedish krona had fallen from 5.58 kroner to one dollar to 6.84 kroner to one dollar, a drop of 22.5%, and the final decline was around 25%.

In just over a month, after paying $30 million in borrowing costs, Bell Stone's $1.6 billion principal became $1.86 billion, with a yield of 16.25%, which is a reasonable figure.

The important thing is that it makes sense to be able to make such huge gains without leverage and a huge amount of principal. Most of Bell Stone's money was invested elsewhere. Moreover, he will not be able to go all out like the Quantum Fund and build a five-billion-dollar super-position.

In fact, he had another $600 million in over-the-counter options, and it was HSBC that was unlucky, because Bell Stone's counterparty announced its collapse, and HSBC would replace the unknown commercial bank as Bell Stone's counterparty.

Liao Chengde and Andrew each earned $8.125 million, which made them infinitely feel the power of currency wars, and what they didn't know was that this pattern of wars would happen again and again. (To be continued......)

PS: The data of the Swedish krona was finally found, and I was really tired. What Baidu web pages, news information, and market software are too unreliable and superficial.