You pick up the phone, and the first thing you hear is "The AKP's been banned! We're hearing it out of Istanbul! AKP's history! You look at your intraday USD/TRY chart, and this is what you see:
Your Bloomberg "NI Turkey" newswire still has nothing on it, but spot is moving higher. You ask about Erdogan, but the bank has heard nothing, and spot is moving higher. You know that if the worst comes to pass, you'll need to act quickly to makes the (enormous) loss as small as possible. You ask for a price, and you get shown a 1.1950 offer in $10 mio, a drop in the bucket. Your heart is pounding, and you know the next 3 minutes will make or break your month, and possibly your year.
SO WHAT DO YOU DO? Do you start buying your position back- you see that at another bank, someone else is already paying 1.20- or do you sit tight?
Welcome to macro fantasy camp, as this is exactly the sort of position that traders find themselves in with alarming frequency. Make your choice, then scroll down to see the outcome.
THE OUTCOME
Spot jumps around for a minute (though it seems like an hour), than your Bloomberg streaming media starts broadcasting the announcement live. In Turkish.
USD/TRY starts drifting lower, but there's still nothing on the newswires. To add a bit of spice to the equation, your daily P/L mark occurs in 1 minute: you have no idea if this will be a great day, a horrible one, or something in between.
Then it comes. A fiery red Bloomberg headline appears on your newswire:
TURKISH COURT REFUSES TO BAN RULING PARTY
"YEAH, BABY!", you shout, no doubt deafening your poor salesperson on the phone. You hang up and high five the guy next to you, thankful that you didn't panic and pay up to cover when spot jumped.
While this little bit of role-playing
is fantasy, there is more than a kernel of real-world truth in it. If you do this job long enough, you get to experience plenty of make-or-break flashpoints over which you have no control.
In this case, not paying up was the right thing to do, though has the AKP and Erdogan been banned, you'd be kicking yourself. However, insofar as there's a moral to this little story, it's that it's generally better to make a later, informed decision than an earlier, uninformed one.
Well, either that, or to hedge yourself ahead of time.
