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The LTCM Fiasco
By Declan Hayes, Ozan Akdogan and Philipp Kallerhoff
Case Summary
This important case study is for advanced students and it presumes a knowledge of derivative markets. Although the material might be considered heavy going for most students, it will be light relief for students studying derivative products or advanced courses in finance. A glossary has been supplied, which pre-supposes a basic familiarity with derivatives.
The 1998 failure of Long-Term Capital Management (LTCM) had a severe short-term impact on world stock markets. Indeed, the immediate fallout from LTCM’s collapse was so big that the Federal Reserve Bank of New York had to facilitate a bailout of the private hedge fund in case a forced liquidation would ravage world markets. The collapse was particularly problematic as LTCM’s core officers included two of the Nobel Laureates, who developed option-pricing theory, the theory on which hedge fund trading is based. Because LTCM was also backed by some of Wall Street’s biggest firms, the collapse is of particular significance as it suggests a more systematic failure. This case study, which examines LTCM’s collapse, is therefore of interest to all students and practitioners of option trading, value at risk and other advanced topics in finance.
This case makes a good companion to Case "Barings Bank: The Lessons of Bad Governance" (by Declan Hayes).
Recommended level:
This is a very advanced case, which is ideal for students of advanced topics in finance and governance.
No. of Pages 17
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