Correlations among fundamental factors Correlations among hedge funds: Trading strategies Other Risks Arbitrage Liquidity is the greatest risk for arbitrageurs which could not be measured by traditional risk management methods Market disruption, political risk e. So we can solve it! And we have another equation: 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. Because the yield curve in a 2-dimension space, it can only move parallel or rotate. Correlation risk Every bet was losing simultaneously, correlations among trades were 1.

Correlation among crashes are positive. Feedback Privacy Policy Feedback. And the model did not include extreme event. The Model B-S assumption: How did LTCM manage its liquidity risk?

Auth with social network: The Exhibit in the next slide illustrates that the risk of a shudy increases with the number of positions, depending on the correlation between the profits of the individual positions. The cash follow will change now, we should first decide the cash flow. Share buttons are a little bit lower.

Other factors Risk tolerance Expectations Time Horizon. How did LTCM manage its liquidity risk?

ltcm case study ppt

One month ago Green: To make this website work, we log user data and share it with processors. This finding is consistent with an increase in the strength of a too-big-to-fail policy.

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

Only some of the discount could explained by the time value of the money or the risk of the acquisition not being consummated.


The relative strategy should be a three factors model: Equity market Dow fell p before noon. Cash flow of repo: The spreads therefore did not have to be large in order for risk arbitrage to enhance the Sharpe Ratio of the fund.

About project SlidePlayer Terms of Service. So LTCM sold options to earn the price discrepancy. In other words, finding large stusy discrepancies will reduce the risk the fund is exposed to. Selling directional position adding converge position to reduce Model Risk. Liquidity is characterized by a high level of trading activity. Example Valuation of swap The term structure curve. 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.

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. What would be the results if the LTCM were liquidated? Using of leverage Ltdm 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.


ltcm case study ppt

But if the index level moved pot the lower limit or the upper limit, a loss would occur. Pay fixed-rate in 3 year swaps Receiving fixed-rate in 7 year swaps Pay fixed-rate in 10 year swaps. The curvature of the curve.

ltcm case study ppt

Here we also used this kind of idea to do arbitrage, when the yield curve shifts, we make sure that the value do not change, but and only when the yield curve changes its shape, then we gain or loss. Each lycm, we hold omega i shares If we want to use the immunization strategy, we should promise that: For obligations, enough liquid assets can be used to meet the payment.

Different time point; Time Point: An Empirical Study Possible benefits of Fed intervention: For a liquid asset, it can be sold 1 rapidly, 2 with minimum loss of value, 3 anytime within market hours.

Long-Term Capital Management, L.P.

Chapter 16 Investing in Bonds. Selling Volatility Trade Introduction Risks. The portfolio is also immune to the n-1 factors.