LTCM CASE STUDY PPT

Risk Concerns A over view of operational risk: Thus, the LTCM control the portfolio risk by holding positions with profits that are uncorrelated as much as possible. The definition of swap spread: One day ago Blue: Example The parameters are: Extra WC Declining trading volume:

Meriwether had been a successful bond trader at Salomon Brothers when that firm underwent investigation for submitting false bids at Treasury bond auctions. In other words, finding large pricing discrepancies will reduce the risk the fund is exposed to. Brazil and Russia without comparative advantage Equity: Could the fund still profit? Although these banks borrowed less at the height of the crisis, evidence suggests that this reduction in borrowing was demand driven and did not result from rationing by the market.

ltcm case study ppt

Thus, the LTCM control the portfolio risk by holding positions with profits that are uncorrelated as much as possible. Second, Fed intervention would prevent the failure of any major commercial or investment bank, thereby avoiding the disruptions to economic activity that such a failure might cause. Selling Volatility Trade Introduction Risks. Extra WC Declining trading volume: T Y Preferences of specific maturities.

Long-Term Capital Management, L.P. – ppt download

Meriwether had been a successful bond trader at Salomon Brothers when that firm underwent investigation for submitting false bids at Treasury bond auctions. Could the fund still profit? Example Only from mathematic analysis, we can get the following conclusion: Less risky deals had lower spread. One month ago Green: Bet spread between spreads of Germany and GB would narrow Exotic bonds: Under what condition the solutions do not exit?

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How did LTCM manage its liquidity risk? The swap spread The interest of Treasury bond. So we can solve it!

The cash follow will change now, we should first decide the cash flow. We need one more equation…….

Long-Term Capital Management, L.P.

Not only bet on Realized Vol. Russiacredit risk can make an arbitrage risky Deep arbitrage requires a favor financing cost and efficient market Multiple conterparties and transaction risks Caused more demanding margins than pair transaction Huge scale made block trading difficult, not price taker Other Risks Agency problem and human factors Behavior finance: Then we know that we can buy Cash Flow Table: As a normal yield curve the curve should slope up, when you find such a curve shape, you can do arbitrage following the below strategy-Butterfly Strategy: So LTCM sold options to earn the price discrepancy.

Tailored product with less liquidity Behavior finance: Thus when markets moved against LTCM, they simultaneously moved against the institutions that were following similar strategies.

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ltcm case study ppt

Example The parameters are: Different time point; Time Point: Example Value of repo: But if the index level moved outside the lower limit or the upper limit, a loss would occur. In particular, the risk of a long-short position depended entirely on the degree to which the profits on the long position could deviate from the profits on the short position.

ltcm case study ppt

It was difficult to predict the market volatility. Correlations among fundamental factors Correlations among hedge funds: An Empirical Study Possible costs of Fed intervention: For example, the Fund had many positions that would be affected by a breakup of EMU that was scheduled to be completed on January 1, in Europe.

This should be zero, so we get lttcm third equation.

LTCM betting volatility going down, lost a lot. The relative strategy should be a three factors model: