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1010110-Cor-7 - EquityDerivatives andRelatedProducts Class7...

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Equity Derivatives  and Related Products Class 7: Derivatives Gone Awry   Mark Zurack October 19, 2010
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1002080-MBA-7 2 Class Objectives Michael Jenkins from Jane Street Capital will share his views on trading  and risk management Review Assignment 4 I will lead a discussion on the Leland O’Brien Rubenstein and LTCM  cases.  We will discuss what factors contributed to market distress in  1987 and 1998 Based on what we learned from those cases, identify similarities  between 1987 and 1998 and events of 2008 and 2010 1010110-Cor-7
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1002080-MBA-7 3 P.I. Grew with Futures 0 20 40 60 80 100 120 1981 1982 1983 1984 1985 1986 1987 Portfolio Insurance Assets ($bb)           . 0 20,000 40,000 60,000 80,000 100,000 120,000 140,000 S&P 500 Futures Open Interest (contracts)  . Total PI Assets ($bb LHS) Futures OI (contracts RHS) Source:  Harvard Business  School Case 294-061 1010110-Cor-7
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1002080-MBA-7 4 The Vicious Cycle  Cumulative Number of Contracts Needed to Sell 0 50,000 100,000 150,000 200,000 250,000 300,000 350,000 -5% -10% -15% -20% -25% Prior Week Avg Volume Oct 19 Volume Market Move 1 yr ATM 1 yr -15% 3 yr ATM Assumptions: 4% dividend yield 8.25% interest rate $80bb of $100bb  using futures only 16% Volatility S&P 500 at 298  (closing price  10/15) 1010110-Cor-7
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1002080-MBA-7 5 P.I. was a Large % of Volume Source:  Harvard Business  School Case 294-061 1010110-Cor-7
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1002080-MBA-7 6 Especially on October 19 Source:  Harvard Business  School Case 294-061 1010110-Cor-7
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