May be... There is free lunch

This blog is an analysis of how an investor who I know made money making a bet on the Chinese currency. 

Most people would be on my side if I say Chinese currency was valued way below its fair value. Also, there are economists who claim that China is being a currency manipulator.  This hot discussion has been going on for the past few years. My friend bought Chinese Yuan worth 1 Million US Dollars in March 2008 and sold it today.

Table 1: Business case

	In USD	In CNY
On March 2008	$1.00	CNY 7.45
He bought CNY worth $1 MM	$1,000,000.00	CNY 7,450,000.00
On October 2012	$1.00	CNY 6.25
He sold all CNY he had		CNY 1,192,000.00
Profit in the deal		CNY 192,000.00
Profit (In %)		19.20%
On an Annualized basis		4.49%

For people who have been following my blog, we have spoken about investments that offer a breakthrough return.  You could think that this is not really a noteworthy investment. But, it is. For all of you who have a decent understanding about macroeconomics and capital markets, there is 0% probability that Chinese yuan can weaken against the US Dollar (in the period 2008-2012). Chinese Businesses were strong, there was an increase in the spending behavior and there was an increase (since 2008) in both local and global demand for Chinese goods. On the other hand, USA was in a bad state in an economical perspective. Unemployment was higher than 8%, there was a decrease in local demand, there was a debt ceiling issue and there was a decrease in consumption of the USA. Given all of the above, I would say the risk of the above investment is negligibly low. On a risk adjusted return basis, this is an awesome investment.

I would argue that the risk involved in this investment is comparable to the risk involved on a 10-Year T-Bond. A 10-Year bond has less than 2% yield whereas our investment has more than twice the return from a 10-year T-Bond. Clearly, the investment we are talking about has a higher risk-adjusted return than most investment opportunities we get in the real world.

On the flipside, we don’t really get to see many opportunities like this. Watch the business world carefully. When you see these opportunities, go and take the free money.