One core trade in the LTCM strategies was to purchase the old benchmark — now a With the help of Merrill Lynch, LTCM secured hundreds of millions of dollars from business owners, celebrities and even private university endowments and later the Italian central bank. The resulting leverage ratio had increased from 27 to to The key is that eventually the two bonds must converge to the same value. Venfin also wanted to increase its shareholding in Vodacom that was, at that point of time, extremely successful and profitable.

In addition, the firm lacked the diverse revenue streams of the Wall Street investment banks to which it liked to compare itself. Meriwether headed Salomon Brothers ‘ bond arbitrage desk until he resigned in amid a trading scandal. For example, the most recently issued treasury bond in the US — known as the benchmark — will be more liquid than bonds of similar but slightly shorter maturity that were issued previously. A put option gives the holder the right, but not the obligation, to sell the underlying asset by a certain date for a certain price. Corporates’ desire to de-leverage and clear the balance sheet of unpopular cross-shareholdings without indulging in a fire-sale or a rights issue means they are willing to look at other ways of monetising assets.

ltcm case study summary

Because LTCM was not the only fund pursuing such a strategy, and because the proprietary trading desks of the banks also held some similar trades, the divergence from fair value was made worse as these other positions were also liquidated. The price referred to is known as the exercise price or strike price.

Long-Term Capital Management – Wikipedia

By using this site, you agree to the Terms of Use and Privacy Policy. This may be no easy matter, as additional capital will be needed precisely after the fund suffers a large loss. According to the model developed by Merton the risk could be reduced to zero, but in practice some of the crucial assumptions of Merton’s model did not hold so the risk of the hedged portfolios was not really zero, as subsequent events proved [5].


In addition, as the fund was organized in the Cayman Islands, there was uncertainty as to whether the lenders could have liquidated their collateral. Equity derivatives are now an integral part of the equity dialogue between banks and corporates.

This would have led them to notice that the main risk lied in the illiquidity of the LTCM shares. Venfin enlarged their stake in Vodacom by, efficiently, using a non-strategic investment in Richemont 5. There are many advantages in issuing corporate warrants: Archived from the original PDF on Chairman Alan Greenspan testified that “Had the failure of LTCM triggered the seizing up of markets, substantial damage could have been inflicted on many market participants, including some not directly involved with the firm, and could have potentially impaired the economies of many nations, including our own.

In contrast, such liquidation is explicitly allowed under the U.

The Story of Long-Term Capital Management

As of this writing, though, the future of the fund is ccase in doubt. This exposure to the shape of the yield curve could be managed at a portfolio level, and hedged out by entering a smaller steepener in other similar securities. In the case of LTCM, however, the fund was able to obtain next-to-zero haircuts, as it was widely viewed as “safe” by its lenders.

ltcm case study summary

Fed; dissolution Headquarters GreenwichConnecticut Key people. Financial services Investment management. The date in the contract is known as the expiration, expiry, exercise or maturity date [2], [3]. LTCM’s main strategy was to make convergence trades. As such, hedge funds are not regulated by the SEC.


Together with the gross warrant premium of Accordingly, we have the price equality: If the company was unable stusy extend its financing agreements, then it would be forced to sell the securities it owned and to cse back the securities it was short at market prices, regardless of whether these were favourable from a valuation perspective. Ten days may be sufficient for a commercial bank, which is closely supervised by a regulator who can step in at the first sign of trouble.

Troubles stjdy in May and June of Venfin also inherited the From Wikipedia, the free encyclopedia. These trades involved finding securities that were mispriced relative to one another, taking long positions in the cheap ones and short positions in the rich ones.

ltcm case study summary

Why was this the case and why did LTCM fell for such a deal? Corporates can utilise equity derivatives effectively and efficiently if they understand the risks involved. The recent Enron-like debacles and new accounting standards have thrown the spotlight on equity derivative structures spurring a quantum leap ltxm treasurers’ knowledge of financial engineering.

Dummary 21 Lessons from Funds: This represents the total assets of the fund, most of it borrowed. The idea behind LTCM was quite simple to articulate but not necessarily that easy to implement. LTCM was to look for arbritage opportunities in markets using computers, massive databases and the insights of top-level theorists.