The essential characteristic of a liquid market is that there are ready and willing buyers and sellers at all times. Each security, we hold omega i shares If we want to use the immunization strategy, we should promise that: Banks became risk averse and might require repayments due to the bad performance The fund: LTCM simultaneously sold long-term puts and calls on an index. Under what condition the solutions do not exit? Selling directional position adding converge position to reduce Model Risk.

Risk Concerns A over view of operational risk: First, such policy maker action would limit the market disruption arising from a forced liquidation of LTCM. Examples of assets that are easily converted into cash include blue chip and money market securities. No explicit equity investment and it is impossible to work directly with measures such as return on equity; Risk could not be measured by the notional sizes of the positions. Using of leverage Leverage is determined by nature of deep arbitrage-spread were to small and so was risk according to model Risk inherent in lever A leverage of times Different from others, leveraged investor are forced to liquid some of its equities in case of loss to avoid loss overwhelming themselves Leverage position is very sensitive to exposures and other factors When market is not continuous even in short time, leveraged investors may not survive to the day converge comes. Facilitating a private-sector rescue of a failing hedge fund was TBTF in disguise.


The portfolio is also immune to the n-1 factors. Example Only from mathematic analysis, we can get the following conclusion: Different time point; Time Point: This finding is consistent with an increase in the strength of a too-big-to-fail policy.

ltcm case study ppt

Different time point; Third row: Now we choose n securities: We use discrete calculation to calculate the result, so we have……. One month ago Green: Example Value of repo: Correlations among fundamental factors Correlations csse hedge funds: Selling directional position adding converge position to reduce Model Risk.

Less risky deals had lower spread.

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Pressure from Bear Stearns-no agreement and could be terminated at any time Multiple counterparties: An Empirical Study Possible costs of Fed intervention: Therefore, the larger the discrepancies are, the more investors and arbitrageurs will join in the trade and the more active ztudy effective the market will be.

It atudy difficult to predict the market volatility. Example If we assume: Bet spread between spreads of Germany and GB would narrow Exotic bonds: 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.


And the model did not include extreme event.

Long-Term Capital Management, L.P.

It was evoked by panic of the street rather than macroeconomic factors. We think you have liked this presentation. Cash flow of repo: Share buttons are a little bit lower.

ltcm case study ppt

Swap Spread Convergence Trade. LTCM betting volatility going down, lost a lot.

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

Different time point; Second row: But if the index level moved outside the lower limit or the upper ccase, a loss would occur. Risks Daily settlement needed a lot of working capital. We need one more equation…….

Incorrect comparison of volatility Heston and Nandi, Someone comparing the implied volatility with the simple measure of historical volatility might often be tempted to sell straddles.

The cash follow will change now, we should first decide the cash flow. They bet that option prices would fall in the future.