As a historical note, the LTCM crisis was caused by Russias default, but LTCM did not bet on Russia or rely on Russian banks. LTCMs big bet was on a narrowing of the price difference between 30 year treasurys and 29 year treasurys. When Russia defaulted people moved out of risky assets into safe assets and lots of people bought 30 years. That temporary huge burst in demand led to a rise in the price of 30s. Given the high leverage of LTCM that was enouph to make them go bust.
This is correct. LTCM’s big trade was a convergence trade which was set up to guarantee profit at maturity. Unfortunately for them LTCM miscalculated volatility and blew up because, basically, it could not meet a margin call.
As a historical note, the LTCM crisis was caused by Russias default, but LTCM did not bet on Russia or rely on Russian banks. LTCMs big bet was on a narrowing of the price difference between 30 year treasurys and 29 year treasurys. When Russia defaulted people moved out of risky assets into safe assets and lots of people bought 30 years. That temporary huge burst in demand led to a rise in the price of 30s. Given the high leverage of LTCM that was enouph to make them go bust.
Thanks for the correction—I had once seen part of a documentary on LCTM and that was what I remembered from it.
This is correct. LTCM’s big trade was a convergence trade which was set up to guarantee profit at maturity. Unfortunately for them LTCM miscalculated volatility and blew up because, basically, it could not meet a margin call.