1010110-Cor-7 - Equity Derivatives and Related Products...

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Unformatted text preview: Equity Derivatives and Related Products Class 7: Derivatives Gone Awry Mark Zurack October 19, 2010 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 OBrien 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 1002080-MBA-7 3 P.I. Grew with Futures 20 40 60 80 100 120 1981 1982 1983 1984 1985 1986 1987 Portfolio Insurance Assets ($bb) . 20,000 40,000 60,000 80,000 100,000 120,000 140,000 S&P 500 Futures Open Interest (contracts) . Total PI Assets ($bb LHS) Futures OI (contracts RHS) Source: Harvard Business School Case 294-061 1010110-Cor-7 1002080-MBA-7 4 The Vicious Cycle Cumulative Number of Contracts Needed to Sell 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 1002080-MBA-7...
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This note was uploaded on 01/25/2011 for the course NBA 6940 at Cornell University (Engineering School).

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1010110-Cor-7 - Equity Derivatives and Related Products...

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