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RTs,
If Italian rates rise relative to US rates, several things can happen to
positions. If you are long both, you lose. If you are short both you
win. If you are short Italian and long US, you can win if the
proportions are right. If you are long Italian and short US in the
right proportions, you lose big time.
Nick
> -----Original Message-----
> From: RAY RAFFURTY [SMTP:rraff@xxxxxxxxxxx]
> Sent: Monday, October 05, 1998 11:32 AM
> To: RealTraders Discussion Group
> Subject: Re: Long Term Capital Management
>
>
> -----Original Message-----
> From: TheGonch <Daniel.Goncharoff@xxxxxxxxxxxxxxxxxxxx>
> To: RealTraders Discussion Group <realtraders@xxxxxxxxxxxxxx>
> Date: Saturday, October 03, 1998 6:52 AM
> Subject: Re: Long Term Capital Management
>
>
> >I am no expert, but a couple of thoughts come to mind quickly:
> >
> >If the stock market drops, who wins??
>
>
> In order to buy stock, someone must be willing to sell it. The winner
> is
> the person who sold at/near the top. He is an even bigger winner if
> he sold
> short.
>
> >Similarly, if Italian interest rates go up relative to US interest
> >rates, who wins?
>
>
> Likewise, in the deratives markets there is always someone who takes
> the
> opposite side of each transaction. The money that LTCM lost did not
> "evaporate" it was transfered to others.
>
> >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.
>
> No, not true. It is however, a very effective re-distributor of
> wealth. I
> recall when U.S. interest rates where in double digits and rising. A
> CD
> paid an excellent return. A few years later the same people where
> complaining that they could not live on 3-4%. They did not understand
> that
> market conditions had changed.
>
> The goal is to be on the right side of the trade, not necessarily from
> the
> very beginning to the very end. More importantly, it is vital to be
> able to
> admit you are wrong and get out with small losses.
>
> LTCM was short market volatility (betting that high volatility would
> decline, giving then a large profit). This is a position with limited
> up
> side potential, hence the need for them to take very large positions
> and
> requiring high leverage to achieve these positions. While this is a
> strategy that often times works, it is by no means a shure thing, and
> when
> wrong the losses can be unlimited. In addition they where trading in
> illiquid markets, making it very difficult to get out of them.
>
> In addition, I had heard that as they realized they where in trouble,
> they
> tried to sell there portfolio. In order to do this they had to reveal
> their
> positions, giving speculators the opportunity to take them down.
>
> Good luck and good
> trading,
> Ray
> Raffurty
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