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Sorry, I just don't get it...
When the stock market drops, everybody holding the stock issued by the
company loses. There are no winners. The ones who 'sold at the top'
don't win, they just avoid losing.
Same thing with bonds issued by the Italian government.
The hedge between Italian bonds and US treasuries is more complicated.
The Treasury short does require a counterparty, so for that PART of the
trade there is a 'winner'. Hopwever, since it is only part of the trade,
LTCM could have been the winner on that part of the trade, and still be
a net loser on the arbitrage.
Regards
Dan Goncharoff
Richard Parsons wrote:
>
> Dan, the way I see it is this:
>
> The number of shares in a company/index does not change significantly
> (discounting share splits and share options), OK; the share price/index
> value does change. For every buyer there has to be a seller, right.
>
> >If the stock market drops, who wins??
> >
>
> Those who sold at the top.<g>
>
> >Similarly, if Italian interest rates go up relative to US interest
> >rates, who wins?
>
> Wouldn't this be the banks and money lenders who use variable interest
> rates?
>
> The real problem is when the wealthy people who put these trades on fail to
> pay out when they lose. Hence Greenspan's attempt to persuade LTCM to honour
> its commitments.
>
> RPP
>
> -----Original Message-----
> From: TheGonch <Daniel.Goncharoff@xxxxxxxxxxxxxxxxxxxx>
> To: RealTraders Discussion Group <realtraders@xxxxxxxxxxxxxx>
> Date: 03 October 1998 11:53
> Subject: Re: Long Term Capital Management
>
> >Richard Parsons wrote:
> >>
> >> Forgive me if I'm missing something here but isn't one traders loss
> >> another's gain?
> >>
> >I am no expert, but a couple of thoughts come to mind quickly:
> >
> >If the stock market drops, who wins??
> >
> >Similarly, if Italian interest rates go up relative to US interest
> >rates, who wins?
> >
> >It seems to me that both a falling stock market and rising interest
> >rates both eliminate wealth. Together they can eliminate a lot of
> >wealth.
> >
> >JMO
> >
> >Dan Goncharoff
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