Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Technology Stocks : Intel Corporation (INTC) -- Ignore unavailable to you. Want to Upgrade?

To: Gordon Hodgson who wrote (179984)	12/22/2004 8:39:18 AM
From: GVTucker	Respond to of 186894

Gordon, RE: Long Term Capital Management (LTCM) thought they had a perfect arbitrage going using Black, Scholes, and Merton's formula. Excpet they didn't use Black-Scholes.

To: Gordon Hodgson who wrote (179984)	12/22/2004 9:19:52 AM
From: Dave	Respond to of 186894

Gordon, RE: LTCM There were quite a few reasons why, in the end, that LTCM failed. As the partners of that firm said, they believed that they were a "vacuum cleaner" scooping up nickels on the ground. Of course, others believed that LTCM was, essentially, scooping up those nickels in front of a bulldozer. This was their convergence trade where they would essentially short the "on the run" 30 year treasury and go long the 29.5 yr treasury. Eventually, everyone entered that area of the market and the arbitrage opportunity, eventually, vanished. Later, they entered the merger arbitrage (equity) and promptly lost a bundle on the failed Ciena merger. When other brokerages learned that LTCM was "on the ropes", it is rumored that other brokerages took the "opposite" side of the LTCM trades causing them to lose even more money. Basically, LTCM did not become insolvent b/c of Black Scholes. Dave