Derivatives: Darth Vader's Revenge Message Board

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Non-Tech : Derivatives: Darth Vader's Revenge

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To: Worswick who wrote (288)	10/2/1998 1:40:00 AM
From: Enigma	Read Replies (1) of 2794

Worswick - I am trying to get to the bottom of the business of the collateral offered by hedge funds to lenders - it is said of one situation that most of its loans are 'collateralised'. I could understand it if a hedge fund were to borrow $1million and buy a bond for a million - it could, I guess, offer the bond as security. This transaction has not initially increased the equity of the fund's unit holders - only the profit on the sale of the bond would do this. But what happens if the fund goes out and buys $20 million worth of bonds - on the basis of borrowing from a broker at 5% margin. The 'collateral' offered to the original lender becomes the 5% margin account with the broker!. I'm not dealing with derivatives here I realise, trying to use a simple transaction as an example - but it makes me think that in reality there can be no actual collateral offered to the original lender at all. I can't see how there can be because the fund's hands would be tied if it wants to leverage its loan - which in the case of LTC it must have been doing many times over. E

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