Company With Contrarian Bet on Yuan Devaluation

June 22, 2011



I’ve been questioning the Yuan “40% undervaluation” consensus well over a year now, and wrote a post “Pondering a Yuan Devaluation.” Apparently, skepticism among others is growing. While many banks are encouraging their clients to bet on continued appreciation, put buyers are growing in ranks.  The reasoning is the credit bubble, expected flooding of Yuan to recapitalize banks, and a reversal in hot money inflows. Gradual appreciations have a way of lulling investors to sleep.

The WSJ has an article about the trade :

“The cost of a one-year contract allowing the investor to sell $10 million of yuan at 20% below current levels over one year costs just about 0.15 percentage point, or $15,000.

If the yuan tumbles below that strike price, say to 8.5 for each dollar, or about 30% below the current level, the put contract would soar in value, leading to a profit of about $850,000 from the $15,000 investment, or a return of about 5,500%.

“Given the magnitude of China’s credit problems, it’s at least a possibility that the yuan drops sharply,” said Cullen Thompson, managing partner of Bienville Capital Management LLC, a New York investment firm placing bets against the yuan. “The potential of the trade is so great, and when there’s cheap insurance in today’s environment it’s silly not to buy it.”

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