In the novel Cosmopolis by Don DeLillo, the main character Eric Packer is a whiz at currency trading. Currency trading is fairly unknown to the average consumer and perusing book commentary most readers are confused by the jargon referenced in the story. However, reading the story as someone who has some knowledge of the currency markets and trading, there are some clues dropped in by the author. These clues provide us insight into the specific type of currency trading that lead the Eric Packer’s downfall. This article is an attempt to provide readers the basics of the financial back story. Hopefully enabling the reader a view into the mindset of the character Eric Packer. Let’s begin with the basics of the New York Stock exchange and trading stock. We will then relate those concepts to trading currency. Lastly, illustrating these concepts using specific lines from the novel.
There are several markets around the world that trade stocks. Stocks are instruments of public companies, known as stock certificates and the price or value of these instruments fluctuates daily. For example, the New York Stock Exchange (NYSE) is the most widely known, besides the NASDAQ which are based in New York City. However, there are other stock markets around the world, for example the Nikkei (Japan), FTSE (UK), Hang Seng (Hong Kong). The basic concepts of stock trading are to buy and sell shares of companies. The stock shares are usually bartered on the floor of the exchange where the prices are set by those who wish to sell and those who are buying. The concepts of supply and demand apply here, where there is higher demand for a stock the seller can charge a higher price. At it’s most basic, it’s sellers and buyers exchanging ownership of stock certificates.
Most readers understand the concepts of currencies and each country having their own money. If you’ve ever traveled to another country you may have exchanged your own country’s currency for the currency of the country of your destination. When you exchange your currency there is always a stated exchange rate. These rates are the value of the currency against another currency and like stocks, these prices fluctuate daily. World currencies, just like stocks are traded on an exchange called the ForEx, short for foreign exchange.
Now, trading currencies has no real protection or regulations like the stock market (SEC). The ForEx is basically gambling like placing bets in a casino. You place a ‘bet’ on which way the price of the currency will move. This is where Eric Packer is obsessed with patterns. There are distinct trading histories and patterns that help in predicting which way the currency price will move. If your gamble is right, you make money.
Within the concept of trading both currencies and stocks, there is a system where you can ‘borrow’ the money to trade, you can trade on credit. In the stock world these are called margin accounts. In the currency world, it’s called a ‘carry trade’. Within the story Cosmopolis, when Packer and Chin are conversing in the limo, Chin alludes to this concept. On page 10 Chin replies to Packer “…we are borrowing enormous sums…”
All currencies are traded in pre-set pairs on the ForEx. In the book we are made aware almost from the first pages that Eric Packer is gambling on the Japanese Yen. However, we do not know what pair he is trading with until his conversation with Jane Melman on page 21 Jane indicates it is with the US dollar. This is a common trade pair USD/JPY on the foreign exchange.
Consider walking up to a teller window at a casino and asking to borrow $1,000 before you place a bet. Like any loan, you have to agree to a repayment ‘interest rate’. However, with a ‘carry trade’ the interest rate isn’t final until the end of the market day. This leaves a gamble if you bet the wrong way, not only do you loose the $1,000 you borrowed but you have an undetermined amount of interest to repay. On page 19, Jane Melman indicates to Eric Packer the same “…we have a yen carry that could crush us in hours…”. Additionally, the gamble that Eric Packer makes is dependent upon this fluctuating interest rate that his bet is will remain the same. On Page 18, Jane Melman expresses to Eric Packer that the interest rate was left unchanged. In the final exchange between Eric and Jane, on page 21, they indicate which way they place their bet. “the dollar will settle up…the yen will drop”.
This is the basis of the gamble that is the back story surrounding Cosmopolis. Not only does Eric make the gamble and loose on the bet, he looses because he borrowed more money than he could repay with the decisions he made against the yen.
For further information on ‘carry trade’ please consider another example outlined here. http://www.investopedia.com/terms/c/currencycarrytrade.asp
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