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Orange County Case - Orange OrangeCountyCase...

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Orange County Case Using Value at Risk to Control Financial Risk By Professor Philippe Jorion http://merage.uci.edu/~jorion/oc/case.html
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What happened? In December 1994 Orange County announces In December 1994, Orange County announces that its investment pool had suffered a loss of $1 6 billion $1.6 billion . This loss was the result of unsupervised investment activity of Bob Citron the County investment activity of Bob Citron, the County Treasurer, who was entrusted with a $7.5 billion portfolio belonging to county schools portfolio belonging to county schools, cities, special districts and the county itself.
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How did it happen? Citron's main purpose was to increase current Citron s main purpose was to increase current income by exploiting the fact that medium term maturities had higher yields than short term investments. Increase the duration of the investment to pick up an extra yield Implication: Bob Citron was implementing a big bet that interest rates would fall or stay low.
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Yield Curve Play What’s your prediction What s your prediction of movement in the interest rate in 1994? Current yield curve : Bloomberg
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Table 1. Maturity and Duration 8% Yield, 8% Coupon Bonds Maturity Duration (Years) (Years) 1 0.93 2 1.78 3 2.59 5 3.99 7 5.21 10 6 71 6.71 30 11.26
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