10_26_2010 Orange County

10_26_2010 Orange County - FIXED INCOME SECURITIES OCTOBER...

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1 NAME OF INITIATIVE OR GROUP FIXED INCOME SECURITIES Spring 2010 – FNCE 235/725 Prof. Stephan Dieckmann OCTOBER 26, 2010 ORANGE COUNTY
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Orange County • In December 1994, Orange County surprised financial markets by announcing that its investment pool had suffered a loss of $1.6 billion. At that point, it was the largest loss ever recorded by a local government investment pool, it led to the bankruptcy shortly thereafter. • Bob Citron, the County Treasurer, was entrusted with a $7.5 billion portfolio. He was able to amplify returns by investing in derivatives securities and leveraging the portfolio. He implemented a portfolio strategy betting that interest rates would fall or stay low. • The collapse: His strategy worked fine as long as interest rates were low. In 1994, however, the Federal Reserve Bank started a series of consecutive interest rate increases. The large interest rate sensitivity led to a $1.6 billion loss. What had happened?
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This note was uploaded on 03/27/2012 for the course FNCE 235 taught by Professor Roussanov during the Spring '09 term at UPenn.

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10_26_2010 Orange County - FIXED INCOME SECURITIES OCTOBER...

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