Currency hedging (exchange rate "insurance") -- any demand for it?

The LindeX exchange rate (Linden dollar vs. US dollar) fluctuates.

This can be disadvantageous if you collect revenue in L$ but have to pay tier in US$, because it makes it harder to budget and plan.

In RL, there is a thing called "currency hedging". For a price, you can buy the ability to essentially lock in an exchange rate for some future date.

If you are a landlord, would you be interested in such a thing?

For instance, if three months from now you anticipate that you will receive a sum of Linden dollars equivalent to $ X US dollars at today's exchange rate, would you be willing to give up, say, 4% of that in order to ensure that that L$ income would still produce the equivalent of $ X US dollars for you regardless of what the exchange rate happens to be three months from now?

There are a few reasons why landlords might *not* be interested in such a thing:

-- The Linden dollar has been slowly but steadily increasing in recent months. Ie, if you click on LindeX Market Data (https://secondlife.com/currency/market.php) and click on the "90 days" link, you can see that the Linden dollar has risen about 3% against the US dollar in the past 90 days. (Remember that if the exchange rate falls from 280 to 271, that means the Linden dollar has *risen* in value. To see that, imagine if the exchange rate went all the way down to 1: the Linden dollar would then be equivalent to a US dollar -- far more valuable than it is today). So landlords could simply cross their fingers and hope that the trend will continue.

-- Landlords can ask their tenants to pay in US dollars using PayPal. However, some tenants may balk at this for privacy reasons, and some countries can't use PayPal.

-- Landlords can ask their tenants to pay in Linden dollars, but adjust the rate periodically to ensure a steady US-dollar-equivalent income. However, this creates a minor burden of frequently communicating the latest rental rates to tenants, makes it harder for tenants to pay in advance, requires frequent adjustment to rent-o-matic objects, and so forth.

So, if a form of currency hedging service was available on SL, would there be a demand for it?

Unless this were run by LL, it would have all the problems that all banking, insurance, etc. schemes have in SL.

There are no laws or justice system. In RL if you hedge on one of the currency markets, there are pretty serious government agencies in several countries that will back up you claims against fraud. This doesn't exist in SL.

Currency hedging is only used in RL by pretty big players, the overhead is too big otherwise. I'd think that would be broadly true in SL as well, and the risk of trusting someone with a significant L$ investment is pretty high.

This is something I thought of and I had a false start with, myself.
There would be a demand for it, and I would be interested in creating a facility for it, if, as Mr. Ralph said, there were laws protecting against fraud AND a way to enforce claims. Otherwise, the amounts of money make it too risky. I wouldn't invest in such an instrument, and I wouldn't feel comfortable taking money from others to provide such an instrument, without the proper regulations in place. Regulations protect the banks, too... Regulations help the investors by protecting them from scams and bankruptcies, and also protect the bankers who wish to operate legitamately from suffering unfair competition.

So, to answer your quesiton, i'd estimate the demand at near zero.

I'd also like to add that it would be a conflict of interest for LL to provide this instrument directly, since they effectively control the exchange rate.

One of the missing elements in SL is justice. Civilization requires it.
Without an accepted justice system, there can be no enforcable 'in world' contracts.
Until there are means of seeking redress for grievances, criminal and civil, SL is always on the cusp of anarchy.
Only our collective will holds it together.

Wich is what makes SL so interesting ^_^

OK, what you guys are pointing out is what's known as "counterparty risk" -- the possibility that the other person in a transaction won't pay you on the settlement date. Obviously, that's a big issue in a place like SL.

But what about the idea itself? In other words, if Linden Lab themselves offered such a service (unlikely), or some company with suitable financing or venture capital, would it be something that landlords (or possibly large merchants) would take advantage of? Or is it simply unnecessary because you can just charge PayPal or whatever?


PS,

The actual amounts in question (at risk) would not be all that large. If the notional amount was US$ 1000 worth of income, a 3% change in exchange rate would correspond to US$ 30. Even 3% of US$ 10,000 (far larger than most monthly incomes in SL) would be US$ 300, and it's not unheard of for someone renting an entire island from a land baron to pay that amount for monthly rent in advance.

So perhaps there might be some demand after all?


PPS,

This is a world where an anonymous outfit like Ginko Financial claims assets of L$ 73 million. So there are obviously some very trusting souls out there, and obviously some very hardened cynics over here... and nobody in between?

I don't see how LL could in good conscience offer hedging against adverse currency movements when LL are themselves one of the major influences on the exchange rate via Supply Linden sales of lindens.

You're quite right, it would probably have to be a third party. Suppose Anshe Chung decided to do this (purely hypothetical, I have no reason to believe she would do so, I just mention her as an example of a very large company within SL)? Or Electric Sheep, or Millions of Us, or some other similar organization?

Mind you, any third-party enterprise large enough to be absolutely trusted (like a RL bank) would probably have Enterprise or Currency Trader level 4 trading limits... which are comparable to Supply Linden's. I do believe, however, that Lawrence Linden has stated that he ultimately intends to set trading limits to be percentages of daily volume rather than absolute numerical amounts, precisely to limit the possibility of currency manipulation. And as long as Supply Linden's limits are in the same ballpark as the largest third-party currency traders, it probably shouldn't be an issue.

Note that the Linden dollar has been steadily increasing in value (3% over the last 90 days) despite the fact that Supply Linden's sales have been rapidly increasing. This suggests that Supply Linden's sales have been in the interest of stabilization, to prevent the Linden dollar from rising in value too quickly. All those unverified noobs, each and every one a would-be griefer in the general opinion, sure do seem to have a collective appetite for Linden dollars... which they are presumably spending on stuff in-world. Any RL country that had a huge increase in population would need to increase the money supply accordingly, and SL is no exception.

These exchange rates are nothing but a racket to benefit them and nothing else. The same thing with A. C. They took US$ from me for tier which they weren't suppose to and then when they returned it, I decided to take it in L but was given way below the amount Linden sells the same amount.
When I complained about it being it was about 600 or 700L less, they claimed to have their own exchange rates which is bs.
It was either this or I'd have to "wait a long time to get it back in US currency".


Yeah, it's all one big racket...in their favor of course.

Just like real life - if you want to exchange foreign currency you never do it at one of those exchange booths at the airport or in a shop, you'll always get a lousy rate. Change at your bank.

In order to create Linden futures, you would need to be able to borrow L$ from a central bank (i.e. LL). Futures prices are dependent on the borrowing costs of each currency. I've heard that LL will eventually start lending money, and then you'll see futures markets spring up

An exchange offering Lindeen Dollar futures falls into the US Commodity Futures Trading Commission Act....

Lee, what I had in mind were NDFs (non-deliverable forward contracts)... not futures, not traded on an exchange. A slightly obscure instrument in RL, suitable for emerging markets with restrictions on currency trading volume. Settlement would be in L$.