Congrats, you just doubled your money in less than 3 days.

If everyone is aware of this issue then the currency market has already taken it into consideration and it will be reflected in price. After reviewing the daily chart on the EUR/DKK it would appear it has already bottomed as a result of the Latvian economic situation around 7.44. The banks already got the jump on everyone else. If anything buying it might not be a bad idea above 7.4460 and a stop at 7.4398. Just a thought. There are other currency pairs available that cost less with better entries. Good Luck, Simon, and thanks for the efforts overseas.

Scott

Latvia is probably just a straw in the wind really but shows the inherent problems faced in Europe and the Baltics……many of which would not be problems should the Euro devalue.

Personally I am slowly but surely adding long XAG/EUR and XAG/EUR positions. What concerns me mostly is how the market reacts to a breakdown in equity markets which I think is likely at least by first quarter of 2010 if not sooner. I will be watching and waiting to see how this plays itself out (if of course it happens at all) and looking load up on long metals positions mentioned above, dependent on the outcome.

Leland

The banks might have to raise equity again for sure. However, their equity is not as shot anymore as last time you discussed this. Buy puts on SWED-A in Sweden, since this is the most liquid market. The spreads killed me in norway doing this on DNBNOR (which didn’t fall either). And oviously, things take time, so longer maturities are probably smart. I’m tempted to do it again, but I am not sure if the massive downside is there anymore. Best, Henrik

However, here in Sweden they have talked and written a lot about this and how it would influence the Swedish Krona.
The latest news is that they will not devalue in the Baltics, the Swedish banks will manage and the krona is undervalued against the Euro at least. Againt the USD is another story, because the USD is undervalued.

Thanks!

The big question is: Will the European Central Bank and the IMF allow Latvia to devalue or will they bail them out? Will the banks convert these loans to the Latvian currency before a devaluation occurs?

That’s up to you to decide.

For now, let’s assume you’re right and Latvia will devalue…

I went looking for a way to profit from this situation and realized that with a Latvian devaluation, the Swedish banks will indeed be hit and therefore the Swedish stock (equity) market as a whole.

I then found that an ETF for the Swedish equity market exists. The ticker code is EWD and it trades on the NYSE. Better still, it offers options.

I looked at the options and they are pretty thin and the spreads are wide. This means we have a potential to be stuck in a trade. It also means that the price of the ETF has to move more before we break even.

The good news is that you don’t necessarily have to pay the ask price (I never do) and this options are prone to volatility spikes which mean that your options can gain a lot without much movement in the ETF itself.

So let’s also assume we won’t get stuck in the trade and we can shave a bit off the bid / ask spread.

I went and selected the April 2010 23 Put because I know you like longer term trades and because the 23 strike requires the least movement to double and it is also the cheapest option with that expiry relative to the other strikes (lowest implied volatility). If we shave a bit off and buy puts at $2.10 then we stand to double our money if the ETF drops to between $19 and $19.50. However, if we encounter an implied volatility spike like we have experienced 5 times this year so far, then we could easily double our money with the ETF only dropping to $22.50.

So that’s one way to theoretically skin this cat.