Science to carry

# # # By Juan Margalef Roig, Enrique Outerelo Domínguez and Salvador Miret Artés *

Can you sell what you do not have? In financial economics; yes. Selling short (or short) means selling securities that are not owned.

An investor can borrow, in exchange for the payment of a ‘rent’ (or premium), shares to another investor … and obtain significant benefits from this operation .

Suppose that our investor becomes ‘bearish’ with respect to the shares of a company; that is, it has the sensation or intuition that the action of a certain company will fall within a reasonable period of time. Through its broker, you can borrow 20,000 shares of that company from another investor to sell them immediately afterwards.

Author: Alberto Carrasco-Casado

Let us also suppose that at the time of this operation the stock is quoted at 13 euros and that, a few weeks later, according to the expectations of our investor, the price drops to 9 euros. At that time, you can undo the position; that is, buy 20,000 shares and return them to whoever had left them on loan.

If we consider that at that time the company has distributed a dividend of 1 euro per share, which the owner of the securities must receive, we can calculate the profit of the operation. Leaving aside the management expenses (agent commissions and the ‘rent’ of the shares) the profit is 20,000 x 13 – 20,000 x 9 – 20,000 x 1 = 60,000 euros.

This practice, common in the financial world, is regulated in Spain by the National Securities Market Commission (CNMV). The organization requires investors sufficient guarantees to cover all steps of the operation (especially, provided by other investors), which are returned with their interests at the end of the process.

If the stock, instead of falling, increases in price, the broker, following the regulations of the CNMV, will ask for more guarantees to the investor or will undo the position immediately. If the stock is unpaid at 15 euros, the investor’s losses will be: 20,000 x 13 – 20,000 x 15 – 20,000 x 1 = – 60,000 euros (the negative sign means losses).

The ‘bearish’ scenario could have been imagined or intuited, for example, by the actions of Spanish banks due to the Greek crisis of last July. So it was.


The same idea underlies the speculation known as ‘attack on a coin’ which is supposed to be a weak currency. Without wanting to give names of people or groups of people who have done it, we will briefly describe this scenario. The speculator, without departing from the regulations of country M or international regulations, asks for a loan from the currency of country M. Immediately after receiving the loan, he changes it to dollars or any other ‘strong’ currency that is chosen to operate . This last operation takes place within the financial system of country M, therefore the currency reserve of M decreases. This operation is repeated 4, 5 or 6 times in a short time, decreasing more and more the currency reserve of country M and, sometimes, in a generalized environment of rumors and signs of devaluation. When the devaluation expected by the speculator arrives, he returns the loans in the M currency, which, being devalued, leaves him an important benefit.

Let’s see this procedure with an example. The speculator will receive five successive loans of 200 million coins of M; and it will change each one of them with the following type of change: the first, 100 coins of M for 1 dollar; the second, 105 by 1; the third, 110 by 1; the fourth, 120 by 1; and the fifth, 125 for 1. Without counting the interest and the expenses of currency exchange, the speculator owes 1,000 million coins of M and will have in his possession 8,989,610.39 dollars. Suppose that after the official devaluation in M, the change is 150 M coins for 1 dollar. Then our individual will change $ 6,666,666.67 to obtain the 1,000 million M currency with which to repay their loans, and will retain a profit of $ 2,322,943.72.


* Juan Margalef Roig and Salvador Miret Artés are researchers from the CSIC at the Institute of Fundamental Physics. Enrique Outerelo Domínguez is a professor at the Complutense University of Madrid. The three are authors of the four volumes of the work Probability and Economics (Sanz and Torres).


About Mar Gulis:

#Bajo the collective name of Mar Gulis (in tribute to the great researcher and disseminator #