Ultra long-term British Pound chart

Data sources: Global Financial Data, Bloomberg

Data is available from 1660 but due to the spike in the exchange rate up to 5000 between 1776-1781 it has been excluded in order to show a better scaled chart.

Analysis by PolarPacific (July 2004):
 Long term chart of GBP vs USD

Some levels of interest

2.00: last peak (prior to EMS crisis)
2.20: current value of logscale trendline joining major tops in 1864 and 1934
2.40: geometric average between 20th century monthly closing High at 5.28 and monthly closing Low at 1.09.
2.80: peak during post-WWII stability and neckline of inverted H&S formation

Allowing for the Bretton Woods regime, during the 50-year span from 1951-2001 there were altogether 7 major Lows — all spaced virtually 100 months apart. These 7 actual Lows plus the next 2 projected ones in OCT2009 and FEB2018 are indicated by the red boxes.

The Hedge Fund Song

(to the tune of “What Is a Man?”)

There are so many, so many
Hedge funds to choose
Which one is the best hedge fund for me?
They all are long-and-short, as far as I can see
Seven thousands funds, one strategy.

There is no risk
None whatsoever
Win, lose or draw
They take my fees
I’ll  prob’ly lose all my money
Something about it seems funny.

There is no risk
With a long-short fund
They charge me fees,
’cause they are so good.
Thank goodness I’m in a long-short fund!
They’ll take my fees,
Fees upon fees,
I give it all to them!

Five percent
Quite a low commission
Four percent management fee
Plus one-fifth
Of my profits
One-third if they’re good
Goodbye, goodbye gains!

What’s a good fund?
Is it a black hole?
Taking more fees
‘Till I’m bled dry?
Paying a bite to a fund of funds?
It’s a good deal,
Really a steal,
The manager wins in the end.

Short Talk

(Lyrics by Laurel Kenner and Victor Niederhoffer)

Original lyrics and music from the song “Small Talk” in the 1952 musical “Pajama Game” by Richard Adler and Jerry Ross

I don’t want to sell stocks short
When there’s been a big decline
I don’t want to sell stocks short
Buy and hold is more my line

Let’s not talk about metals
Or how China’s buying oil
Why don’t we stop all this short talk?
we’ve got something better for our cash to do,
And that takes no shorts at all.
Deficit is getting bigger,
Gold is headed to four figures
Short talk!
The Fed will act to curb inflation
There is too much speculation.
Short talk!
Heard on the news the other day
That rents are nuts out Hamptons way
Wall Street guys agreeing to pay
a three-month rent of six hundred K

Heard on the news the other night
That stocks will fall when money’s tight
And corp’rate rates are getting high and
Bush is going to bomb Iran
In our next war.

[I don’t want to talk short talk…]
What do you think they charge for gas now?
Got so a buck ain’t worth a damn now.
Real estate is slowing down
The Fed’s not going to fool around.
Dollar’s headed to a crisis
‘Least that is what David Tice says
I don’t want to sell stocks short
When there’s been a big decline
I don’t want to sell stocks short
Buy and hold is more my line

Let’s not talk up the bear side
I don’t think the sky will fall.
Why don’t we stop all this short talk?
we’ve got something better for our cash to do,
And that takes no shorts at all.

The Bottom Line

Johnny Cash sings “Walk the Line”

I keep a close watch on this stock of mine

I keep eyes wide open all the time
I set a loose stop in case a big decline
I hope you mind, the bottom line

I find it very, very tempting to sell you
I find myself alone in owning you
Yes, I’ll admit, I paid too much for you
You didn’t mind, the bottom line

As sure as value is dark and growth is light
I keep you on my watch list day and night
And since momentum says you are alright
I will not mind, your bottom line

You’ve got a filing to show me what you hide
You give an earnings call to plead your side
And yet your stock price will not turn the tide
Because you’re mine, I curse my pride

I keep a close watch on this stock of mine
I keep my eyes wide open all the time
Oh Lord, I fear a very big decline
Who cares about, the bottom line

How To Become A Good Spec

By Victor Niederhoffer (adapted by Gary Rogan)

When the day is filled with sorrow
And your screen is flashing red,
Will you live to fight tomorrow
Or decide that you’re dead?

Will you turn out like Mike Bastian,
Knowing how to play the game,
Or like poor St. Sebastian
Stopping arrows with your frame?

Will you look like Good Ol’ Hetty
Never washing her black dress,
Or end up like John Paul Getty,
After learning to play chess?

Save your pennies, live through sorrows,
You will take the booty home,
You will make it like George S0r0s,
Rich and famous palindrome.
Will the landscape of deception,
Fool you with a tough disguise,
Will you have the risk perception
For returns to realize?

Will you study math and science
To become a better spec,
Or provide SorbOx compliance
For a small cap in Quebec?

Will your brain become a scramble,
And you’ll never get the joke
When you go for your last gamble?
Son, the gamblers, they die broke

Payroll Friday

(to the tune of Manic Monday)
By George Zachar

Eight-thirty already?
I was just in the middle of a dream.
I was boinking Angelina in
My brand new G5 Gulfstream.

But I must wake up
because the payroll report just came
This is a day
When I so often get maimed.

It’s just another payroll Friday.
It never is my day.
Cause it’s a whip day.
My “why am I always wrong?” day.

Have to put my orders in
Got to pick my buys and sells.
And if I had tomorrow’s Times
I’d still never get a fill.

Cause the market seems to know
Just where I need to execute.
And that damn economist
Won’t stop talking on the hoot.

It’s just another payroll Friday.
It never is my day.
Cause it’s a whip day
My “why am I always wrong?” day.

Of all of the nights
why did Bernanke have to talk last night
with that frown?
Doesn’t it matter that the planet’s all geared up
and unemployment’s down?

He tells me as I’m ready to choke,
“C’mon markets, don’t you get the joke?”

Time it goes so slow
when you’re getting crushed….

It’s just another payroll Friday.
It never is my day.
Cause it’s a whip day
My “why am I always wrong?” day.

The Day The Dollar Died

By Harry Chernoff  (with due apologies to Don Maclean’s American Pie)

A long, long time ago
I can still remember
How the dollar used to make me smile.
And I knew if I had my chance
I’d sell the currency of France
And, maybe, I’d be happy for awhile.
But all our spending made me shiver
With every T-bill we deliver.
Bad news on the doorstep;
I couldn’t take one more step.
I can’t remember if I cried
When I heard our politicians lied
But something touched me deep inside
The day the dollar died.

So bye-bye, dollar assets good-bye
Sold my Chevy at the levee
Cause my pension ran dry.
Them good old boys were drinking sake to try
Singing this will be the day that it died
This’ll be the day that it died.

Did you write Whitehouse.gov
Or have you a Yen to fall in love
If Japan will tell you so?
Now, do you believe in oil and coal
Can China fill our import hole
And can we teach them how to grow real slow?
Well I know the country’s fit and trim
cause the jobs are in the Pacific Rim.
We all knew savers lose
Man, I dug not having to choose.
We were living off the almighty buck
We got their goods and they were stuck
But I knew we were out of luck
The day the dollar died.
I started singing…


Now for ten years we were sure we owned
All the stocks and bonds and mortgage loans
But that’s not how it’s gonna be.
When we’ve spent it all like kings and queens
In clothes we bought from The Philippines
The Asians pick the reserve currency.
Oh, and while the king was looking down,
Their central bankers came to town.
Our stocks and bonds were spurned
Those dollars were returned.
And while unions filled their books with Marx
The President said drill in parks
Our thermostats froze in the dark
The day the dollar died.
We were singing…


Helter skelter in a summer swelter
The equity is gone from your leveraged shelter
Fannie and Freddie are falling fast.
Crash, they landed, but in a new class
Full faith and credit have long since passed
With Congress, in denial, out of gas.
Now the Wal-Mart there has cheap perfume
With imports filling every room.
We all got up to dance
Oh, but we never got the chance.
The consumers tried to take the field
The central banks refused to yield
Do you recall what was revealed
The day the dollar died?
We started singing…


Oh, and there we were all in one place
Our credit rating in disgrace
With no time left to start again.
So come on: Al be nimble, Al be quick!
Al, cut rates by 50 ticks
Cause credit is the debtor’s only friend.
Oh, and as I watched him on the stage
My hands were clenched in fists of rage
No congressman in hell
Could buy what he would sell.
And as the rates climbed high into the night
To stem the U.S. asset flight
The IMF said, Yes, that’s right
The day the dollar died
They were singing…


I met a girl who sang the blues
And I asked her if we still could choose
But she just smiled and turned away.
I went down to the Medicare store
Where we had spent our dollars years before
But the man there said those dollars wouldn’t pay.
And in the streets the children screamed
The seniors cried and the workers steamed
But not a word was spoken
The commitments all were broken.
And the three men I admire most:
Faber, Rogers, and Bill Gross
Were at the forex trading post
The day the dollar died.
And they were singing…

(Refrain x2)

My Best Trade Ever

By: Anonymous

To this day, I confront the same emotions. I have learned better control and have learned the signals of impending emotional responses.

I now anticipate, control them, and put them away. They have become my friends and my teachers.

Earlier in my trading experience I had spent 18 months, five hours a day, learning and trading various platforms and methods. I treated trading as a job from the first day, no mulligans permitted. I researched, read, struggled, made error after error, modified my trading plan and finally, after 18 months I felt ready to “go live” with real money. For the record, I was making between 5 and 15 trades per trading day and over the term had made an average of 256 pips per month with a 78% correct trade record. Not a bad record. I was ready. I gathered up my $10,000 and opened my live account with a reputable brokerage. Continue reading “My Best Trade Ever”

A short story for quants

Dear Mr Derman,

You are always writing about the difficulty of being a good quant, but it’s not that hard. Read please my story and don’t be so serious!

I have come to New York with a PhD from ********. Quickly, I answered an internet ad by a chasseur de tête who sent me to a foreign bank. Two interviews and I aced them all. A week later, I’m on the desk. “Dude, you are getting a Dell!” I say to myself.

With my scientific PhD, I find option theory easy as π. I have studied heat conduction and quantum mechanics so I quickly comprehend the options: α is intercept, β slope, Γ curvature, ∆ tangent, σ temperature, θ sensitivity, µ drift. If I know derivatives, I know Derivatives. Soon I am an expert at Black-Scholes and Beyond. Yield curves are strings. Feynman to me? Kaç to you! Everything’s an option. I am one dynamic hedger, man.

On the prop desk my boss is Alden, an MBA, and I’m his quantitative guy. He calls me a geek;
he knows no math but he sure knows business; he can use the same word as noun, adjective, exclamation and gerund in single sentence when he’s angry. Alden’s risque assistant is Lidia, a truly exotic option, a total knock-out with a non-normal distribution which makes the option salesman whistle and mutter softly about barrier penetration.

I have rational expectations for Lidia but I feel she don’t respect me. She like old movies but has no taste for mathematics and its beauty. To her I am far out-of-the-money.

Now the bank wants to do structured products. I have Excel, I buy VBA, I get models from optionmodels.com and now I’m in business. We’re doing long-term puts and calls, down-and-outs, converts, one-touches, spread options, CDS, vol swaptions, whatever, and I’m getting all the prices. I find model for anything. Easy as Dell. Once a week we run my spreadsheet to mark the book. Big P&L fast. Then late dinner with Alden at Bouley or Jean-Georges.

But always Lidia’s on my mind. When I watch her wandering across the floor, I cannot but think of excess kurtosis. I try to cliquet with her for coffee but she DK my trade. I sense there is little chance of a transformation between her p-measure and my q-measure.

One day someone offer Alden a big position in spread option barrier reversal American no-touch interest rate euro swaptions, denominated in Turkish lira. According to my model, these Sobranies are pretty cheap. Lots of α, high κ, big Sharpe. Alden take $100 million face for the desk and his boss bought some for his own PA too.

Next day the broker offered us much more at the same price – great deal! Each day’s close I tell Alden how my model says to rehedge the Eurodollar futures and the lira, and then we execute. Except I am always thinking sadly about Lidia, dreaming of her capital assets. Will I ever know her efficient frontier?

Next week comes by the head of model risk, ENS graduate Dr Jean-Martin Geille, an expert in Malliavin calculus. And Vlad, chief risk modeller.

“You’re VAR is way up, mon ami,” said J-M to Alden, very loud. “What model ‘ave you used for the Sobranies?”

My model is one-factor Monte Carlo with control variate, $125 from the web. Vlad’s is three-factor Crank-Nicolson PDE with fat tails and LU decomposition, he tells me, written in Java on his Linux laptop. His say we have a lot less α than mine.

“You pay too much µ for too little κ!” say Vlad.

“What’s it all about, α?” Lidia sings in her deep voice. She cannot understand the situation is serious.

But J-M does. “I am arrestin’ you for ze future mis-markin’ of complex instruments,” he yells, waving his hands as he jumps in front of Alden. He joke, but Alden doesn’t laugh. He knows J-M would do anything to make risk department look good. We are ε away from big trouble.

That night the risk committee uses Vlad’s model. Their report shows big drop in our marks. “No-one knows what this is really worth,” moans Alden. “We’d better unwind and cut our losses. No Zermatt this Xmas …” Bonus day is only a month away.

So much volatility is difficult to concentrate… At the close I execute the end-of-day Eurodollar hedge and leave lira rebalancing for next morning.

When I get to work Alden is popping.

“Did you hedge last night?” he yell.

“Eurodollars yes, lira no!” I say.

“Great!” shout Alden. “Trouble in the Middle East – 7 percentage point drop in the Turkish lira overnight. The Sobranies knocked in. How’d you guess?”

“I been learning extreme value theory,” I tell Alden.

“Good call, guy!” he say as he squeeze my shoulder.

The Sobranies triple and we close out. I make 20 units for the desk. Lidia looks at me with new respect. On bonus day I invite her to dinner at Jean-Georges.

“How did you do it?” she smile at me over the Petrus ‘85.

I can see our implied correlation is approaching unity and I am ready to early exercise.

“Behavioural finance,” I tell Lidia as I take her hand. “The market is like a shy woman who suddenly
find she’s beautiful: slow to passion but fiery when aroused…”

Soon perhaps I start my own market-neutral hedge fund, offshore. Meanwhile, I hope my story encourage your readers.

D***** B*****

Source: www.risk.net October 2003

A day in the life of a foreign exchange trader

By Mitesh of Goldman Sachs

Working as a trader in FX, I trade the Swiss franc. It is exciting — the foreign exchange markets operate 24 hours a day and any moment anything can happen. You have to be ready to react. The anticipation ahead of big numbers and the buzz you get from trading them is phenomenal.

6:30 a.m. – Getting Started

I usually get to my desk about 6:30 a.m. I start the morning by noting down the overnight ranges and calling our Asian desk to find out what’s happened overnight. Then I read the overnight recaps and news, and look at where things are trading at the moment. Usually, if one currency or another has made a notable move, we will discuss it and collate thoughts regarding what we think and what positions to put on/take off.

7:30 a.m. – Take the orders from Tokyo

The day speeds up once Europe and London are all in and liquidity improves. Clients can call in any time. Most tend to call in early to find out what’s been happening overnight. The majority of the business we handle tends to take place after 7:30-8:00 a.m. London time. European and UK data usually comes out from 9 a.m.-11a.m.

Mid-day – New York and London both open

Throughout the day, we take calls from clients. We take an active interest in what our clients are doing and their trading styles. We have a lot of contact with them and it is always interesting. Over time, I’ve developed relationships with several. This helps us improve the services we offer as well as build brand loyalty in the transparent currency markets. Lunch — which we have at our desk if the markets and phones are quiet — is usually just a quick sandwich.

Afternoon – London closes

The day goes by very quickly. The New York markets trade briskly at mid-day. The markets in London move towards the close in late afternoon. Each of the traders here covers separate books, i.e. different currencies, and on any given day, one may trade more actively then others. That’s why, while we’re each focused on a different currency, essentially we work as a team. We’ll often cover for each other taking calls and orders so someone else can handle a large position or talk with a client. We’re also constantly bouncing trading ideas off each other. There’s a good deal of give and take on the desk.

Winding Down – New York closes

There is a typically a lull in currencies as the NY markets wind down for the day. Tokyo won’t open again for several hours. So I usually go home around six. The workday, though, isn’t always over. Sometimes I’ll take positions overnight, monitor them from home and, if necessary, call into NY or Tokyo to trade. The currency markets trade around the clock — and there’s always something happening. That’s what makes this job so interesting.