International Finance System And George Soros Course Work

Published: 2021-06-23 15:45:04
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Introduction

One of the most enigmatic figures of modern times is Hungarian-American business man George Soros. George Soros is the chairman of the Soros Fund Management, an American hedge fund company that was established by George Soros in 1969. The company is headquartered in New York and as of 2010 the company was recorded as the most profitable firm in this particular industry . According to Ahmed (2011), the company’s average rate of return is an astounding 20% per year since the 1980s. The Soros Fund Management is an investment adviser and its primary client is the Quantum Group of Funds. Quantum Group of Funds is a collection of funds that have invested in several growth industries globally. It has equity holdings in various infrastructure projects, real estate developments, new-technology companies, energy generation companies, and metals and minerals development businesses. Quantum Group of Funds also owns stock in various well known corporations including Lattice Semiconductor, Ford Moto Company, Bluefly and Hess Corporation among others. However as of 2011, Quantum Group of Funds decided to return the money and all the earnings of its undisclosed funders and would concentrate on managing the money of the Soros family.

George Soros is known as “The Man Who Broke the Bank of England”. George got this name in 1992’s “Black Wednesday” an event that happened in the United Kingdom which resulted in a currency crisis in England and a net of about US$ 1 billion for George Soros through gains from his currency hedging investments. While being a notorious currency trader is his most infamous claim, he also is a well-known progressive political figure. Much of the money George Soros makes is handed to humanitarian causes such as those concerning the plight of and issues for human rights, public health and meaningful education having given educational endowments to higher education institutions.From the start of 1984 to the end of 1989, George Soros was in the middle of the political transition of his home country, Hungary from a communist estate to a capitalist economy.

Investment Acumen

A George Soros investment is one that many critics feel is a bundle of animosity and genius. George Soros is famed for his unique investment philosophy, being one of the world’s greatest managers of funds in the last decade. His speculation style is always “short-term” choosing to invest large amounts of money on global macroeconomic changes. George Soros gambles on these directional changes especially on currency movements although he has been known to hedge his bets on stocks, bonds, derivatives, even commodities and futures. His bets are only a choice whether the value of these will increase or decrease within a short-period. Although the investment company that George Soros heads is known for its diligence in conducting research and in careful analysis, those that have worked with George Soros says he goes with his lion-like instincts coupled with his eagle-eyed approach in studying his investment targets. This investment philosophy is what George Soros calls “Reflexivity”. According to George Soros, the market participants are the parties responsible for influencing market movements. Instead of the traditional market-equilibrium models where the market participant receives information that forms part of the prices of goods and services, Soros believes that the market player’s irrational behaviour causes fundamental market movements. These behaviours can be observed and investors can profit from a proper read of the result of these behaviours.

There are many conventional and widely accepted market “truths” that George Soros has profited from. A classic example is predicting a market crash. George Soros was able to profit from the gaps in the economic theory for housing prices, for example, because of his unique view of market fundamentals. Everyone understands how housing prices move. When money supply is high in the market due to increase in employment (for example), lenders will allow easier rates for buyer to acquire homes. People will be enticed to borrow money for the purchase of houses. When demand builds up, home prices increase due to the fundamental laws of demand and supply. With prices going higher, lenders are now incentivized to lend out more money to consumers. Such cycle goes on and on until the prices reach the highest, logical levels. However, George Soros thinks that this cycle would eventually lead to a crash because prices are not sustainable and the level of exposure of lenders will lead them to be very vulnerable to shifts in the capability of buyers to pay loans. In classic George Soros approach, he moves on the potential for the fundamentals to shift and bets on quick profit makes. Examples of this strategy include taking a short position on housing lenders or taking a short-selling position on real estate developers.

This investment philosophy caused George Soros to be known as “the Man Who Broke the Bank of England”. In September 1992, George Soros borrowed billions of British pounds and then turned around and exchanged them for German marks. In the very same year, the British currency crashed, diminishing the value of his borrowings. Because he converted the borrowings to the stronger German currency, George Soros was able to pay back his lenders on the basis of the now-diminished value of the British currency by converting back his German currency to British pounds. In a day’s worth of trading, George Soros was able to make about US$ 1 billion just on the value of the difference of the British currency. Analysts estimate that George Soros made a total of US$ 2 billion on this strategy alone and in that year using this crafty approach.

George Soros is not confined to a geographical trading block. In 1997, George Soros employed a similar strategy this time by taking a position on Thailand’s currency. George Soros maneuverer a “prop up” of other currencies that benefited with the crash of Thailand’s Baht which meant that George Soros made other investments in other currencies which would significantly benefit from a devaluation of the target currency. Government agencies, wizening up to this strategy decided to protect their currencies. Thailand’s government was forced to buy Thai Baht in the open market but with very limited funds, was not able to sustain the strategy which caused further erosion in investor confidence and eventually, Thailand currency value. South East Asian countries were literally held storage by George Soros and his short-term profit motivations while on the other side, other investors found a new bandwagon to make a quick profit. A series of correction happened in the market with investors trying to borrow and leverage on possible future currency crashes, and governments trying to safeguard their economies through various monetary measures.

The International Finance System

Is the International Finance System suspect and manoeuvrable, such that an investment manager such as George Soros can manipulate it to his benefit? Is George Soros that fearful of an investment professional that he can literally destroy economies, young and old? George Soros is an iconic figure, but he is less than a financial demi-god as writings about him may suggest. Clearly George Soros is a diligent professional who believes in his own capabilities. He takes a clear position on financial issues, getting as much information as possible regarding his target investments before pulling the trigger and placing a bet. If we are to believe that George Soros performs miracles based on the amassed billions of US dollars made, then we must be prepared to admit that he has made fundamental mistakes as well. George Soros lost US$ 200 million in 1987 due to his rosy prediction of the US economic rise and another US$ 2 billion in the Russian debt crisis of 1998. In 1999 he lost US$ 700 million betting on a technology book and a total of US$ 3 billion when the tech bubble burst.

The lesson that one must learn here is one that is echoed in all management books on risks and returns. High risks merit high rewards and this is a motivation that George Soros must take seriously. He bets on his hunches with extraordinary amounts of money, clearly a make it or break it approach that not a lot of investors have a stomach for. Taken with a clear understanding of the market, he lets his knowledge guide him, but ultimately his instinct define him. And that is the beauty of what George Soros does; he opens the doors to possibilities and teaches us that the limitations are yet to be found.

Works Cited

Ahmed, A. (2011, July 26). Soros to Close His Fund to Outsiders. Retrieved September 9, 2013, from Dea Book: http://dealbook.nytimes.com/2011/07/26/soros-to-close-fund-to-outsiders/?_r=0
Griffiths, T. (2010, October 6). The HFMWeek 50 Most Influential People in Hedge Funds. Retrieved September 3, 2013, from HFMWeek.
Investopedia. (2013, May 13). George Soros: The Philosophy of an Elite Investor. Retrieved September 3, 2013, from Investopedia: http://www.investopedia.com/articles/financial-theory/09/how-soros-does-it.asp
Tiz, J. (2009, February 19). George Soros: International Man of Mystery. Retrieved September 3, 2013, from Canada Free Press: http://www.canadafreepress.com/index.php/article/8574

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