What will be the price of FXP if FXI rise 50% from the present level?
I believe that FXP doubles the inverse of FXI, i.e. if FXI drops 1%, FXP should go up 2% and vice versa.
ON March 20 FXI was at around 120 while FXP was at around 122. On April 07 FXI rose to 150 (gain of 28 buckes) , about 25%, that is (150-120)/120, and FXP dropped to 74 (loss of 48 bucks), about 40%, (122-74)/122.
Say, FXI is around 140 today and if it rises to 210, a 50% rise, what should be the theoretical price of FXP at that time? Would double the inverse makes FXP to drop to 0?
Can someone tell me how to calculate the theoretical value of FXP or direct me to appropriate site.
Best Answer
541 points
NYInvestor answered one year ago …
In short, no, it'll never go to zero. Actually, if the FXI were to rise 50% in a single day, then this could theoretically go to zero but even then it probably wouldn't because not ALL funds are invested - there's still cash on hand and there's still laws of supply and demand in the market.
But to really illustrate why this wouldn't happen, let's quickly look at how the FXI would probably rise...by several points each day. Now the inverse the index is readjusted/rebalanced daily, and that's what prevents it from going to zero. If the FXI rises by 25%, then the inverse will drop by 50%....the following day the FXI could go up by 25% again, and then the inverse will go down by another 50%...as you can see that's not 100% of the original value, but rather 75%. If you want to brush off your calculus books you'll see that this is basically calculating limits.
Hope that helped.
Answers
2769 points
Oldman answered one year ago …
NY investor's math and answer is correct...but the inverse tracking indexes are subject to other drags...they sell puts and short positions, and it takes time to realize the sales, so they lag a bit.
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