What is the rationale of the double-play strategy, Financial Management

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Q. What is the rationale of the double-play strategy?

The hedge funds deploy a double-play strategy in order to engineer steep increases in interest rates and steep declines in stock prices so as to gain from their short positions in the stock market and in the FX futures market.

However first some comments about the economic conditions prevailing at that time. In untimely August of 1998 external and domestic conditions deteriorated. The Dow Jones index refuse sharply by 300 points on August 5th and the Yen was at an eight year low at 147 on August 11th. Rumours were plentiful concerning abandonment of the peg. There was powerful selling pressure on HKD early August.

1. Entrepreneurs shorted the HKD by swapping HKD for USD.

2. On the equity markets the stocks index futures market open positions grow brusquely

The HSI FUTURES rise from 70000 contracts in June to 92000 contracts in August. The strategy of the Hedge Funds was to weaken the steadiness of the exchange value of the HK$ consequently as to produce sharply higher interest rates.

The sharp raise would then lower stock prices it was hoped. Hedge Funds sell HKD. This raise HKD interest rates(r). Such high interest rates can't be tolerated by property developers. Real Estate companies undergo serious losses and their stocks decline sharply. The HSI goes down as the HIBOR goes up. At this point one more strategy is to short sell borrowed shares. So far the existence of futures markets makes this redundant. A speculator is able to short the HSI index instead.


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