On Friday Monitor laid into Bill Ackman, the New York hedge fund manager who says he is betting on a 30 per cent upward revaluation of the Hong Kong dollar. Ackman is right when he argues that the current pegged exchange rate is helping to fuel consumer inflation and push up Hong Kong's property prices. But he is wrong to say the benefits of revaluing the peg to HK$6 to the US dollar outweigh the costs. Ackman maintains that 'the costs of acting today are low'. But as Friday's Monitor explained, a revaluation would hammer the local currency value of Hong Kong's foreign investments, knocking a huge hole in the balance sheets of the city's financial institutions and eating into the purchasing power of Hongkongers' savings. Not surprisingly, the column triggered an avalanche of e-mails from readers with a full spectrum of views. Two will serve as examples. In the first, minority shareholder-rights champion David Webb points out that Friday's Monitor failed to touch on the impact a currency revaluation would have on the Hong Kong stock market. This was a major omission. Hong Kong has by far the most international stock market in the world. A quick look down the list of companies that make up the city's benchmark Hang Seng index shows that only about a third of the 46 constituents generate the majority of their earnings from businesses in Hong Kong. Half the stocks in the list make almost all their profits on the mainland, so naturally their earnings are denominated in yuan. Of the remainder, companies like HSBC, Hutchison Whampoa and Swire Pacific can be considered multinational. Their Hong Kong businesses are important, but they make money all over the world, in a range of currencies. If you are looking for true Hong Kong plays, which generate nearly all their earnings in Hong Kong dollars, you are down to a handful of property developers, smaller banks and utility companies. Now consider the impact of a 30 per cent revaluation of the Hong Kong dollar on a stock index that generates two-thirds of its earnings in foreign currencies. Naturally, if the Hong Kong dollar appreciates, then the HK dollar value of the index companies' foreign earnings will fall. If we estimate that two-thirds of the index's earnings are derived from outside Hong Kong, then the Hong Kong dollar value of the Hang Seng index's total earnings would immediately fall by 15 per cent. As a result, if the index were to maintain the same price to earnings valuation, then the Hang Seng's level would immediately plunge by 15 per cent too. At the market's current capitalisation, that would inflict an instant HK$830 billion loss on investors, on top of the losses they would suffer on their overseas portfolios. In reality, it is likely the market would overshoot. The total cost to local savers would be trillions of Hong Kong dollars. That's hardly 'low', whatever Ackman says. Of course, some Hong Kong investors might want to follow Ackman and bet on a revaluation as a hedge against their possible losses. This brings me to the second letter, which comes from a reader who asks: 'I wanna make the same bet as Bill Ackman; how do I go about doing it?' Well, as we've seen, one way to bet on a revaluation would be to short the Hang Seng index. But Ackman himself recommends buying call options on the Hong Kong dollar against the US dollar, arguing 'call options are extremely cheap'. He estimates that the return on his options in the event of a revaluation would be a handsome 3,600 per cent. But before you call your broker and ask if he offers options on the Hong Kong dollar, do consider that Ackman may not believe the currency will be revalued at all. He's already bought his options. According to one market source, he and other hedge fund managers have been buying for months. To make money on the position he's built up, Ackman doesn't necessarily need to see an actual revaluation. All he needs is for other investors to stampede into the market in response to his warning, which will be enough to push the prices of his options sharply higher. It's already happening. As the chart above shows, since Ackman disclosed his trade last week, the implied volatility on Hong Kong dollar options - the way in which they are commonly priced - has shot to its highest level in more than 2 1/2 years. If it goes much higher, it's quite possible that Ackman will quietly close out his position at a tidy profit. That will leave all the suckers who followed him into the market sitting on options that will expire worthless in 12 months time, after the Hong Kong government has failed to revalue the Hong Kong dollar.