Ltcm Case Report

The LTCM Case report

Overview:

This case tells us the story of LTCM, one of the most successful hedge fund once. However, the company lasted only for about 5 years from the beginning in 1994 to the failed in 1998. The case is divided into several parts. It begins with the description of the company, the business and the founder. Then it explains the strategy that the LTCM used and how LTCM get return with spread, convergence, leverage and so on. After that, the case reviews the successful business of LTCM from 1994 to 1997, during which period, the company was becoming a star in the industry. It follows by the failure. The author give the reason why such a successful company would be bankrupt in 2008 with a loss of 4.5 billion in less than two months. Finally, the case ended by how the company get rescued. It also lists some conclusions and lessons to be learned from the company story.

Answers of review:

1. Given the economic and political turmoil that took place in 1998, what bet would have earned John Meriwether and his team of arbitrageurs the highest profits?

At that time, yield spreads widen globally. Spreads between mortgage rates and US Treasury bond rates, between corporate bonds rates and Treasury bond rates, between junk bond rates and Treasury bond rate, between B-rated bond rate and 3A-rated bond rate, between emerging market bond rate and US Treasury bond rate and so on.

Thus Bet that the yield spread would be wider would bring profits to LTCM.

2. Suppose the yield on a two-year Treasury note was 4%, and the yield on a five-year Treasury note was 6%. If you expected this yield spread to widen, explain the spread trade you would execute.

a. After a year, suppose the yield on a two-year Treasury note fell to 3.5 %, and the yield on a five-year Treasury note rose to 6.5 %. Would you profit