Andy Krieger's New Zealand Dollar Short

In September 1987, a young Bankers Trust trader named Andy Krieger executed one of the largest and most audacious currency shorts in history. Using currency options, he built a position in New Zealand dollars so large—exceeding NZ$7 billion notionally—that it dwarfed the country’s money supply. The trade eventually forced the Reserve Bank of New Zealand to defend its currency through emergency intervention and legal threats against the bank employing Krieger.

The setup: a currency mispriced

In 1987, New Zealand’s currency had soared. The Reserve Bank, fighting inflation, had hiked interest rates sharply. Investors worldwide seeking higher yields flooded into NZD, pushing the exchange rate up. Krieger, then in his early 30s and a rising star at Bankers Trust’s Treasury group, spotted what he believed was a mispricing: the NZ dollar was too expensive.

The logic was sound. New Zealand’s economy was small (population ~3.2 million), its current account was in deficit, and the high interest rates were being used as a policy tool to fight inflation, not reflect genuine economic strength. Fundamentally, the currency was unsustainable at those levels. But markets often ignore fundamentals in favor of yield-chasing momentum.

Krieger decided to short the kiwi—but not through simple spot currency trading. Instead, he bought out-of-the-money puts on the New Zealand dollar, giving him the right to sell NZD at a fixed price. This was the crucial insight: options leverage allowed him to control vast notional exposure with modest cash outlay.

The mechanics: leverage through puts

A currency put is a derivative giving the holder the right to sell a currency at a predetermined strike price. If Krieger bought a put on NZD/USD at a strike of 0.65 when the spot rate was 0.68, he was betting the kiwi would fall below 0.65. If it did, the put gained value, and Krieger could exercise or sell it for a profit.

The power of puts is leverage. A single options contract controls a much larger notional amount than the premium cost. Krieger could buy NZD puts with a few hundred million in premium (capital at risk) while controlling billions in notional exposure. This is standard practice in currency trading, and it’s how institutions regularly hedge or speculate on currencies.

But here’s where size mattered: Krieger accumulated such a massive volume of puts—across multiple strikes, expiries, and counterparties—that he became the dominant player in the NZD options market. In a thin, illiquid market (New Zealand’s currency market was small relative to major pairs like EUR/USD or GBP/USD), a single large participant can move prices.

The squeeze unfolds

As Krieger accumulated puts, two dynamics unfolded. First, the very act of buying so many puts depressed put prices relative to spot. Options market-makers, sensing heavy put buying, widened their bid-ask spreads and quoted higher puts. This reduced Krieger’s cost basis slightly but also signaled to the market that someone was betting big against the kiwi.

Second, Krieger’s position itself became a bearish signal. Sophisticated currency traders noticed the large options flow and began shorting the kiwi outright, amplifying the selling pressure. The currency began to weaken, confirming Krieger’s thesis—and accelerating profits on his puts.

By October 1987, the NZ dollar had fallen significantly. Krieger’s options, initially out-of-the-money, moved in-the-money. Some accounts claim his position grew so large and so profitable that Krieger’s losses on financing costs and bid-ask spreads were offset many times over by the intrinsic value of his puts.

But the size of the position—estimated at NZ$7 billion notional, more than the M1 money supply of New Zealand—triggered alarm in Wellington. The Reserve Bank recognized that a single trader (via one bank) was effectively cornering the NZD market and could force a devaluation.

Central bank intervention and threat

The Reserve Bank of New Zealand moved to defend the currency, raising interest rates further and conducting foreign-exchange interventions in the spot market. But these efforts were overwhelmed by Krieger’s sheer notional size. The central bank couldn’t out-bid one trader controlling a position larger than its policy levers.

Facing a losing battle, the Reserve Bank took an unusual step: it called Bankers Trust senior management and effectively threatened legal action against the bank if it didn’t unwind Krieger’s position. The reserve bank’s argument was that the position was so large it constituted a de facto attack on the nation’s currency and financial system.

Bankers Trust, facing regulatory pressure and reputational risk, instructed Krieger to close the position. Krieger, who had made an estimated $40 million to $300 million (estimates vary widely), complied. The NZ dollar weakened sharply afterward, confirming his thesis.

Why it worked

Krieger’s short succeeded because he identified a macroeconomic misalignment (high interest rates masking weak fundamentals) and had the leverage and scale to exploit it before the market consensus shifted. The options market, thinly traded and less transparent than spot forex, allowed him to accumulate a dominant position without alerting the broader market until it was too late.

The use of options was crucial. Spot shorting of a currency requires borrowing—a expensive, slow process. Options allowed Krieger to express the same short view with far greater leverage per unit of capital. This is the essence of options in speculation: they compress the time and capital required to build and realize large bets.

Aftermath and lessons

The Krieger trade exposed serious structural risks in currency options markets:

• Thin liquidity in emerging-market currency options can be overwhelmed by single large participants.
• Central banks have limited tools to defend a currency when leverage via options creates notional exposure exceeding entire money supplies.
• The absence of position limits on currency derivatives (unlike equity options) allows systemic concentration.

Regulatory responses were muted. Currency markets remain largely unregulated globally, and options markets more so. But the episode did spur some central banks to tighten supervision of large currency option positions and to discourage banks from permitting traders to build one-sided, systemic-scale bets.

Krieger himself became legendary—a reminder that one brilliant trader with leverage and an unmanaged risk appetite can move markets and unsettle nations. The trade was not illegal, not even particularly unethical; it was simply a case of one participant being so large that markets failed to price fairly and central banks couldn’t respond adequately.

The New Zealand short is often cited alongside other famous leveraged currency bets (George Soros’s 1992 pound short, Krieger’s other 1998 and later trades) as an example of how options, leverage, and timing can create outsized profits—and systemic stress.

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