I am very pleased to kick off another season of guest posts from students in my Monetary and Financial Theory class. In this class, every student is required to write 3 blog posts every week. Each of the 40 students chooses 5 over the semester to submit to me, out of which I pick some of the best as guest posts here. (My teaching assistant, Ryoko Sato last year and Adam Larson this year, reads and comments on all of them, 120 a week!)
In this guest post, Jonathan Zimmermann is definitely thinking like an economist in the wake of the Swiss franc shock. Note that CHF is the symbol for Swiss francs, and SNB is the abbreviation for “Swiss National Bank.” Here is Jonathan:
In the space of a few minutes, after the decision of the SNB to remove the floor on the EUR/CHF exchange rate, the cost of one Euro in terms of Swiss francs decreased from 1.2 to 0.86. The exchange rate eventually started to stabilize around the 1:1 parity rate, but as I write the Swiss franc is still more volatile than ever.
The repercussions of this decision are gigantic, and many brokers already announced hundreds of millions of losses. As a Swiss national however, I also notice the more direct (and easier to understand) repercussions of this shock. Indeed, most of my revenues and assets being directly indexed to the value of the Swiss franc, my purchasing power for international goods instantly increased by more than 20%.
Of course, our first reaction, we Swiss, is to think “Waouh! I’m rich, everything is cheap now!” Since the prices are likely to readjust progressively in a way or another, we will probably try to buy as many goods as possible from the rest of the world. As for the rest of the world, they will try to buy as few products from Switzerland as possible.
But we also regret everything we bought the previous day: if we had waited a bit more, they would have been much less expensive. And here is where it is interesting: it is actually possible to get some of your money back. Today, more than ever, return policies are powerful free “put options”.
In many physical and online shops, it is possible to return an item up to a few months after having bought it, to get your money back or a credit in the shop. Some stores are more flexible than others, and some even allow you to return an already used item without having to explain the reasons. Let’s say you received a new TV for Christmas last month that cost 1000CHF in Switzerland and was sold for 850 euros in the Eurozone (i.e. more or less the same price with the old exchange rate) only a few kilometers further. Today, by simply returning your TV to the store, changing the Swiss francs you received in euros and re-buying the same model of TV in France, you just earned 150 Swiss francs without losing anything other than time (and a bit of integrity). This is almost a pure form of arbitrage.
But even better: you could use a similar strategy on items you bought in another country, if you paid in Swiss francs with a Swiss credit card. Amazon’s policy, for example, is to refund you in your local currency at the same rate used when you placed the order! Let’s say you bought a pair of shoes last month for $200 (on the US website, but this would work in any country), paying in Swiss francs through the Amazon currency converter when the dollar was at 1.05. If you ask for a refund, Amazon will credit you 210CHF, and if you buy this same pair of shoes again it will now only cost you 180CHF ($200 at the current exchange rate of 0.9 CHF per USD). Amazon does not accept returns on already used items, but since there is no difference between the item you bought last month and the one you can order now, you can simply buy a new pair of shoes and return it as if it was the old one (so you don’t even need to still physically possess the item you purchased in the first place). Here again, without leaving your house you can make an arbitrage gain of 30CHF on a simple pair of shoes.
Of course, the strategy I just described is probably everything but moral, and I wouldn’t advise using it unless you are a huge fan of smoky-tactics-to-spare-a-few-dollars-and-make-you-feel-like-a-smart-guy. I didn’t use this strategy, and I don’t intend to, but I think it is interesting to be aware of and understand this unusual strategy that has never been more efficient than today.