To cover this loss, the bank must maintain adequate equity capital. It was evoked by panic of the street rather than macroeconomic factors. Banks became risk averse and might require repayments due to the bad performance The fund: 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: Brazil and Russia without comparative advantage Equity: Example If we assume:

Correlation among crashes are positive. The Model B-S assumption: Not only bet on Realized Vol. The Exhibit in the next slide illustrates that the risk of a portfolio increases with the number of positions, depending on the correlation between the profits of the individual positions. The definition of swap spread: 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. 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.

Because the yield curve in a 2-dimension space, it can only move parallel or rotate. 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.


To make this website work, we log user data and share it with processors. In fact such observations seem to occur about one every years. The spreads therefore did not have to be large in order for risk arbitrage to enhance the Sharpe Ratio of the fund.

Long-Term Capital Management, L.P.

The smaller the volatility was, the more profit LTCM would gain. It was evoked by panic of the street rather than macroeconomic factors. It is safer to invest in liquid assets than illiquid ones because it is easier for you to get your money out of the investment. Forced to suffer a loss Super investors More independent decision-making Who would invest under such a situation: Correlations among fundamental factors Correlations among hedge funds: Different time point; Time Point: 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: Capital doubled after three and a half years in LTCM would regularly estimates the profit and loss implications of such an event, and if the expected net outcome were a loss, it might restructure the position to reduce the risk.

ltcm case study ppt

But if the index level moved outside the lower limit or the upper limit, a loss would occur. How to use our model to analyze the relative strategy? As a normal yield curve the curve should slope up, when you find such a curve shape, you can do arbitrage following the below ltcn Strategy: Example Only from mathematic analysis, we can get the following conclusion: Chapter 16 Investing in Bonds.


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

Viswanath 2 A borrowing arrangement where the borrower issues an IOU to the investor. 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.

ltcm case study ppt

This should be zero, so we get the third equation. Examples of assets that are easily converted into cash include blue chip and money market securities. Less risky deals had lower spread.

The curvature of the curve. Not only bet on Realized Vol.

ltcm case study ppt

Therefore, the larger the discrepancies are, the more investors and arbitrageurs will join in the trade and the more active and effective the market will be. Wtudy Privacy Policy Feedback.

Using historical data was risky. Different time point; Third row: And we have another equation: Other factors Risk tolerance Expectations Time Horizon. However, implied volatility can be above historical volatilities without any trading opportunities. What does it mean?

T Y Preferences of specific maturities. The fund could finance the trades very efficiently. Example The parameters are: