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How to profit from the falling pound sterling: Buy put options on FXB

Posted April 29, 2008

by Ian Cooper

Baltimore — (TFN): We’ve all heard about the severity of the UK economic situation. But that’s what you get when you’re dealt a severe credit crunch, a crippled housing market, and a cutback in consumer spending.

It was November 2007 when the Bank of England’s chief economist warned that the effect of the credit crunch on banks may only be the tip of the iceberg.

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Worse, more than 90% of all UK mortgages are adjustable-rate or floating-rate mortgages. More than 1.5 million homeowners are considered subprime, and another four million are seen as high-risk because of imperfect credit histories. British consumers owe $2.8 trillion on credit cards, hold 2.8 credit or debit cards, and have a household debt-to-income ratio of 1.62, as compared to 1.42 in the U.S. Home prices fell 2.5% in March after a 0.4% fall in February. And foreclosures have reached their highest levels since 1999.

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It got so bad that Citigroup recently announced it would cancel the credit cards of more than 160,000 customers deemed to be “too risky.” Even the second largest UK mortgage lender announced it was turning away business to take more control of its future.

Yet, the Bank of England is still far behind the curve needing more than just liquidity injections or aggressive rate cutting campaigns to handle the problem. So how do you profit as the BOE cuts rates?

Consider buying put options on the CurrencyShares British Pound Sterling (FXB). This’ll give you exposure to the falling pound.

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Posted by Ian Cooper · Filed Under International Investing 

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