Tuesday, April 30, 2013

See here how Mark Cuban's brillant play in the Foreign Exchange currency market is going to make the Mavericks a better team. The rich get richer, but this guy is CLEVER!!

Billionaire Mark Cuban is doing something interesting that makes a nice lesson in the Foreign Exchange Market.  See article HERE. He is converting his US debt held in US dollars to debt held in Japanese Yen:
""...in early December, I went and took every penny of debt that I had – with the Mavericks, and personal debt, and everything – and converted it to a yen loan, when I think [the yen] was in the mid 80s [against the dollar]. So, I've been really happy with it.""
WHY would he do this??  Here is as easy an explanation as I can give...

Let's say I have $1 million US dollars of credit card debt.  That is a lot of debt, but assume my credit is excellent.

Today the Exchange Rate between the US Dollar and Japanese Yen is $1= 100. ($1.00 "buy" 100 Yen).  The reciprocal of this is the 1 Yen = $.01 (one cent).  In other words, 1 Yen "buys" one US Cent.

I go to my favorite Japanese bank and borrow the Yen equivalent of $1M US dollars. That would be 100,000,000 (100 million) Yen. 

I take that 100M Yen and exchange it for $1M US dollars (remember the exchange rate I put above)and pay off my loan. 

So far so good. I now have no debt in dollars BUT I have a big debt in Yen...

Assume that because of other things going on in the Japanese economy the exchange rate changes to $1.00 = 125 Yen overnight.  The reciprocal is 1 Yen "buys" $.008 cents (fraction of a penny).

This means the Yen has DEPRECIATED relative to the US Dollar.  It now takes FEWER dollars to buy Yen. More Yen to buy a US dollar.

Assume also the Japanese bank I borrowed the 100M Yen from wants me to pay it back NOW!

At the new exchange rate of $1.00 US dollar exchanging for 125 Yen, I have to come up with "only" $800,000 US dollars to pay back the loan I took out in Yen. ($800,000 X 125 Yen = 100M Yen)

While I put $800,000 back on my "credit card" notice it is $200,000 LESS than it was before. I hve no more debt in Yen and considerably less in US dollars.

Mark Cuban is betting that the Yen is going to DEPRECIATE relative to the US dollar and is using it as an opportunity to reduce his outstanding debt.

This may translate into more financial capital to improve the  Dallas Mavericks, the team he owns.

The rich get richer...

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