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Non-Tech : Derivatives: Darth Vader's Revenge -- Ignore unavailable to you. Want to Upgrade?

To: Bobby Yellin who wrote (309)	10/3/1998 5:13:00 PM
From: ahhaha	Read Replies (2) \| Respond to of 2794

It's a pretty good assessment of the way things have developed. I would only disagree with the claim that recent currency movements have been caused by the unwinding of hedge fund positions. Such transactions volume represents less than 1% of the daily NY Fed clearance. Mark strength, for example, has been building at the margin for years and has dynamically made an upside breakout. That wasn't due to hedge fund transactions. Similarly, it has been persistence of T-bonds on the upside driven by flight capital from Japanese private banks, that blew the perfect hedges of LTCM. Hedge funds can't adjust the short T-bond, long GNMA spread because of rapidly translating spread divergence as a function of time where the hedge is assumed to be time independent. The structural basis upon which the spread depends is high correlation between interest rates and all debt securities. When you have a non-interest rate exogenous factor like the Japanese T-bond buying, and you have GNMA's which are linked more to flat interest rates, you can't adjust to delta zero the respective positions without adding long GNMAs requiring inaccessible quantities of margin. You can still manage the previous positions, but it requires shrinking the exposure and taking loses by covering T-bonds and selling GNMAs. Merriweather wouldn't do that because it meant major losses. That wasn't politically acceptable since the concept of LTCM is minimization of risk. If anyone wants a more detailed explanation of what was going on at LTCM, feel free. I've been there myself with OPM.

To: Bobby Yellin who wrote (309)	10/5/1998 12:17:00 PM
From: Worswick	Read Replies (2) \| Respond to of 2794

Bobby a great article! Congratulations on finding it! Ref the article, "...by LTCM leveraging its capital base into $1 trillion and then playing within the interest rate markets in particular, they in reality are bigger than all the central banks combined, and the unwinding of such positions could in effect disrupt the interest rate policies of all nations." The PEI computer model says that world economic instablility will persist until 2003. Will your terrace be finished by then? After the collapse of teh floating rate system on December 25,2002 we can all begin again. "....We have been warning in our forecasts for the past 15 years that our computer models have targeted the year 2003 as the final collapse in the floating exchange rate system. As we draw closer to that forecast date, our computer does not seem to be so crazy any more. Unfortunately, when it comes to confusion and volatility, the worst is yet to come as we move closer to the end of this business cycle in 2002.85". Boy, were they right on China. My best to you, Clark