Free Lunch Anyone?

We are told time and time again that there is no such thing as a free lunch, and nowhere is this truer than in the world of finance. Known as the “zero arbitrage condition”, it is one of the few things that most economists can agree upon. Go to any finance class in the world and you will be told that if any such opportunity does exist, it disappears almost immediately. But what if I were to tell you that it is possible to buy a currency in one country and then sell it at a 65% premium in another. Would I have your attention?

In July 2014 I was backpacking in Vietnam, where the official currency is the Vietnamese Dong. Unbeknownst to me at the time (and rather ashamedly as an MSc Finance student), this is a closed currency that follows a crawling peg with the US dollar. Officially you are only permitted to buy or sell dong within Vietnam at a current rate of approximately 21,000 dong per US dollar.

 

Through a strange series of events I ended up leaving Vietnam with a princely sum of 17 million dong in my wallet. Upon my return to Europe I discovered that the only way to sell this currency was on ebay.com which technically makes the site a black market for the currency. To my great surprise I found that the dong was trading on the site at an average rate of 12,720 dong per US dollar, representing a premium of over 65%!  

Intrigued by what I had found, I examined the seller’s history, only to find that he was indeed selling large quantities, despite the enormous premium. Not only are there numerous sellers on eBay doing this, but in fact there are entire forums focused on the merits of the dong as an "investment", as well as websites dedicated to selling the Vietnamese dong, and at even higher premiums!

So it appears that to get this elusive free lunch all you have to do is buy dong in Vietnam and then sell it in the United States. Could it really be that simple? Over the coming weeks this blog will aim to answer this question, and discover the reasons behind why so many buyers are paying such an enormous premium for an asset infamous for its depreciation. 

Ultimately I hope that this blog will help to expose what I believe can only be considered an enormous scam being run by sellers, who are praying on the financially illiterate and naive.