Short Selling The Naira Is Turning Into An Attractive Proposition

Imagine that I borrowed $1000 from you when the exchange rate was $1/N520 with a promise to pay you back a month later. In exchange for that I pay you a fee of 5% flat. It means by the time I pay you back, you would expect a sum of  $1050 back.

In a short selling market, I’ll take the $1000 and sell it for N520k. When they exchange rate fell to N380, I’ll buy $1050 at a cost of N399k and then pay you back. I would have pocketed a nice N121k as profit within one month.

While a lot of speculators lost money in the last two to three weeks, some smart ones actually made a lot of money without even owning a single dollar. Short selling is not very common in Nigeria but smart and savvy traders are taking advantage already. They are also simply following the blue print already in practice in European markets. Our sources inform us about foreign investors who have made a kill Shorting the Naira. Abroad, there need not even be physical dollars to trade with. They simply take a bet against the Naira and pocket the difference if their bet pans out as explained above. Now that the naira is weakening again, on the black market, short-sellers are once again taking position.

There are also those who take pride in going long against the naira. These guys continue to buy dollars irrespective of the price believing that on the long run, it will always go against the naira.

Unlike, short-selling, these guys buy low to sell high and are perhaps the ones the CBN loathes. From what we gather, the CBN is determined to defend the naira to any length. In fact, we heard an official of the bank once remarked that they will defend the naira to the very last kobo of reserves.

The Nigerian currency crisis is gradually turning into spectacle and was even recently used in the popular Wall Street Series Billions. In the series, a man was seen pitching Bobby Axelrod, one of the lead characters, about shorting the naira. It might not be long for us to start seeing a reflection of Nigeria’s currency situation depicted in home videos and local music industry.

Incredibly, you can actually swing both ways. Shortselling the naira and go long on against the naira. Take the example above, instead of buying just $1,000 you buy an extra grand or yourself. Once the exchange rate depreciates again to a level you are comfortable with, just sell and pocket some profit. You then borrow again in the hope that it will fall back.

This might all seem like some fiction as seen in the series Billions but this is very possibly happening in Nigeria, especially with the volatility we are seeing in the market. All it requires is greed, understanding of the markets, timing and a stroke of luck.

Credits: Onome Ohwovoriole