file:///C:/Users/user/Downloads/LTCM%20Jorion.pdf This is the case study

These are the questions for the case study given below. Please answer them correctly. Thank you

1. LTCMs Trading Strategies (20 points)

• What are convergence, relative value and directional trade strategies? (10 points)

• Describe some of the main risks of the LTCMs trading strategies. What could go wrong? (10 points)

2. Risk Management at LTCM (20 points)

• Did LTCMs reliance on Value-at-Risk doom it to failure? Please explain in detail and use concrete examples, figures or numbers when answering this question. (10 points)

• Do you think LTCM properly managed its liquidity risk? Were its positions diversified to a great extent? (10 points)

3. Portfolio Optimization and Leverage at LTCM (20 points)

• Do you think LTCM was overleveraged? Explain. (10 points)

• Explain why the drop in the correlation between corporate and treasury yields spelt trouble for LTCM. (10 points)

4. LTCMs Fallout and the Russian Crisis (10 points)

• Please explain how the Russian 1998 financial crisis led to the fall of LTCM. (10 points)

5. LTCMs Bailout (30 points)

• In September 1998 the NY Federal Reserve coordinated a bailout of LTCM by major banks and investment banks. Can that be considered a typical bailout? Was the bailout in the public short-run interest? What were the long-run implications of the Feds actions? (20 points)

• Would you say that LTCM was a systemically important financial institution (SIFI)? (10 points)