Last Updated on Saturday, 13 February 2010 08:40 Written by admin Wednesday, 10 February 2010 09:14

The following article is from Seeking Alpha. In short, they are tracking ETFs that mirror currencies represented in the Big Mac Index. The theory is that if you buy currencies that are undervalued according to the Big Mac Index, and short currencies that are overvalued, you will make money when the value of the currencies converge which they tend to do. Of course, you can profit this way either using ETFs which track currencies or by buying and selling the currencies themselves on the foreign exchange market.

From Seeking Alpha …

Although the validity of the Big Mac index in determining the value of currencies in the real world is suspect, it is still an intriguing idea nonetheless. The Economist’s Big Mac Index is based on the theory of purchasing-power parity (PPP). Exchange rates should equalize the price of a basket of goods in different countries.

The index shows which countries’ currencies are under and overvalued. The most overvalued currency according to the index is the Norwegian Kroner, which is almost 100% above its PPP rate. The most undervalued currency according to the index is the Chinese Yuan, unvervalued by almost 50%.

We thought it would be interesting to take track the performace on the Big Mac Index by through currency ETFs (see here). Unfortunately, there are not ETFs for all of the currencies on this list, but we chose the following:

LONG undervalued BIG MAC currencies:

CNY: Market Vectors Chinese Renminbi USD ETNs

XRU: Currency Shares Russian Ruble Trust

SZR: WisdomTree Dreyfus South African Rand Fund

FXM: Rydex Mexican Peso Trust

SHORT overvalued BIG MAC currencies:

FXF: Rydex Swiss Franc Trust

EUO: ProShares UltraShort Euro (long this index)

FXA: Rydex Australian Dollar Trust