The so-called "financial engineering", originally designed to effectively manage portfolio risks, has now become the use of finance, mathematics, physics and other knowledge to deal with the decomposition and synthesis of financial products. This technology is the basis of understanding the internal risks of financial commodities, so portfolio risk management technology should
An effective tool for intelligent investment experts.
Financial engineers can deal with technical activities, but many investment experts deal with artistic activities. Can art be perfectly combined with science and technology? Not by some simple dialectical laws. Technology can be beautiful and art can be beautiful, but success still needs some "luck". 1998 The story of Long-term Capital Management Company echoes an old saying of China: "Always walk by the water, how can you not wet your shoes".
First, the background of long-term capital management companies
1February, 994, John meriwether founded the macro quantitative fund-long-term capital management company. At that time, the core figures included: David W. Mullins (former deputy director of the Federal Reserve), Myron Scholes (1997 Nobel Prize winner in economics) and merton miller (1990 Nobel Prize winner in economics).
At that time, the main investors of long-term capital management company were UBS and Merry Lynch, the largest banks in Europe. At the time of establishment, the total assets were USD 654.38+RMB 300 million, and the investment period was not less than three years, which means that the customer could not redeem it within three years. The return on investment from 1994 to 1997 is as follows:
1994 1995 1996 1997
19.9% 42.8% 40.8% 17. 1%
By the end of 1997, the assets had increased by 7.5 billion dollars. 1February 1997, customers redeemed $2.7 billion. By the end of 1997, the assets actually managed by Long-term Capital Management Company were USD 4.8 billion.
2. Investment strategy of long-term capital management companies
1. Capital amplification (high financial leverage)
Investors always want to generate the maximum return on investment with the least capital, so for the investment varieties in the interest rate market, adopting high financial leverage tactics is the means to achieve the above goals. Due to the brand reputation of the asset manager and outstanding performance in previous years, LTCM has obtained the highest loan preferential treatment from all banking institutions, and the financing amount of its collateral is often 100%. In other words, the assets obtained by LTCM in the financial commodity market can be further financed by 100%, which means that theoretically the magnification of LTCM can be infinite, or its financing amount is almost infinite. As a result, although the total assets of LTCM are less than $5 billion, it borrows nearly $654.38+025 billion from banks and brokerage institutions, and its asset-liability ratio is more than 20 times. Finally, LTCM's financial leverage ratio is even as high as 26 times.
2. Investment varieties and relative value arbitrage strategy
The huge amount of money obtained by LTCM through the above financing means is mainly used in the interest rate swap market to carry out risk-neutral arbitrage strategy, that is, buying undervalued securities and shorting overvalued securities.
First of all, let's look at the characteristics of the interest rate swap market and the arbitrage strategy in the market. Suppose a company now wants to issue long-term floating rate bills. Since the interest rate is at a low point, if the market interest rate is expected to rise in the future, the interest paid by the company will also increase in the future. Obviously, the interest cost of the company will increase in the future. How can companies avoid interest rate risk? If a company buys an interest rate swap contract (derivative of interest rate) while issuing bonds, it can be converted into a fixed interest rate to pay interest (without worrying about the risk of rising interest rates). (1) interest rate swap contract
In the following example, the company passed on the risk of interest rate rise through the interest rate swap contract, and changed the floating interest rate into a fixed interest rate. This standard interest rate swap contract is an agreement in which one party is a "fixed interest payer" and the other party is a "floating interest payer". When both parties agree on interest, they agree on the date of interest payment and the nominal principal, in particular, both parties only exchange interest, not principal.
The following figure 1 is the cash flow of both parties. In the figure, the solid line indicates fixed interest payment, the dotted line indicates floating interest payment, the arrow indicates cash inflow upwards, and the arrow indicates cash outflow downwards.
Figure 1: Typical cash flow of both parties
(2) Risk neutral arbitrage strategy
Any feature of the above-mentioned standard exchange protocol can be changed, resulting in a non-standard exchange protocol. The exchange protocol of LTCM is a typical nonstandard exchange protocol;
LTCM signed a contract with its counterparty, and if the yield difference between the bonds issued by developing countries and the national debt of developed countries (such as the United States) becomes larger in the future, it must pay a sum of money to the other party. Conversely, if the spread becomes smaller, the other party must pay LTCM a sum of money.
LTCM believes that at the beginning of 1998, due to the impact of the Asian financial crisis, the yield gap between bonds with low liquidity (such as bonds issued by developing countries) and bonds with high liquidity (such as US Treasury bonds) was too large. LTCM predicts that the financial markets of developing countries will gradually return to stability, and the market will be stable, and then the interest rate gap between them will narrow, and LTCM's trading strategy will benefit from it. The essence of the above strategy is to reduce the spread of gambling yield.
The concept of yield difference is shown in Figure 2.
Three. Analysis of LTCM Market Contingency and Investment Risk
1. Market accident
At the beginning of 1998, the total purchase price of derivative financial products engaged by LTCM exceeded 1 trillion US dollars, of which about 70% were interest rate swaps. In this case, a slight narrowing of the interest rate gap will bring huge profits to LTCM. Similarly, a slight increase in the interest rate gap will cause LTCM to go bankrupt immediately.
On August 7th, 1998, the Russian ruble adopted a wide range of floating exchange rate (1 US dollar to 6.0~9.0 rubles), which directly led to a sharp depreciation of the ruble. Yeltsin's government announced an indefinite delay in debt repayment, which triggered credit risk, made bonds of developing countries unattractive and the yield gap widened rapidly. See Figure 3 for the schematic diagram of credit risk change. Due to the rapid expansion of interest spread, the investment loss of LTCM has increased geometrically. By mid-September, 1998, LTCM had lost more than $4 billion, leaving only $600 million in total assets.
Figure 2: Schematic diagram of credit spread (yield difference) Figure 3: Schematic diagram of credit risk change
2. Risk analysis
(1) combination position
At the beginning of 1998, the derivative products managed by LTCM reached about1200 billion US dollars, including interest rate exchange of 697 billion US dollars and other futures of 4.7100 billion US dollars.
(2) High leverage risk analysis
The capital market is risky, but not necessarily profitable. High leverage has two sides, which is the main reason for the failure of LTCM. Since the establishment of LTCM, due to its continuous brilliant achievements and several well-known figures, it is easy to obtain loan assistance. Therefore, LTCM uses these borrowed funds to buy and sell huge financial derivatives. Through the interest rate swap agreement, LTCM can engage in a large number of trading activities with a small amount of funds.
* An increase in interest rates will lead to a decrease in the overall bond value;
* Reduced liquidity leads to lower bond prices.
In fact, due to the decline in liquidity, the Russian government bonds held by LTCM suffered serious losses (the bond market eventually stopped trading due to the devaluation of the ruble). Example 1: The value of Russian government bonds is only 1/3 of the original market price.
(3) Liquidity risk analysis
The liquidity risk caused by the Asian financial turmoil has become the fuse of LTCM bankruptcy. The Asian financial crisis originated from 1997. By the spring of 1998, the Asian financial crisis had not stabilized. LTCM made a more fatal mistake here. Many of its assets are financial commodities with low liquidity, and even LTCM itself is the largest holder of such commodities in the market. Therefore, once LTCM has to sell assets to repay the losses, the total value of LTCM's own assets will also shrink rapidly, which becomes the current risk. 1In August, 1998, the Russian ruble incident occurred, which triggered credit risks, made international investors more aware of the risks of bond investment in developing countries and demanded higher internal rate of return, which led to a decline in bond prices and no interest in bonds in developing countries.
Example 2: LTCM holds more than $65.438+0 billion of commercial real estate mortgage bonds, and the real estate industry was affected by the economic downturn in 654.38+0.998, resulting in a sharp drop in the prices of such bonds.
(4) The influence of 817 Russian ruble incident on arbitrage strategy.
LTCM observed in the early days that the interest rate of German government bonds is low, while the interest rate of other euro countries is high, and the yield difference between them is too big. LTCM sells short German government bonds (because of low interest rates and high prices) and buys government bonds of other euro countries. Obviously, the excessive yield spread will return. LTCM expects interest rates in Germany to rise and those in other euro-zone countries to fall. If the expectation is correct, the excessive yield spread will return to the normal yield spread, and the above arbitrage will be successful.
After the Russian ruble incident, a large number of European funds fled to the safe German bond market, which led to an increase in the price of German government bonds (unexpected decline) and a decrease in the internal rate of return (unexpected rebound).
Example 3: 1998 Before August of 17, the interest rate of Italian 10-year bonds was 30 basis points higher than that of Germany in the same period. After the devaluation of the ruble, European capital flowed to Germany, which led to a decline in German interest rates, and the gap between Italian and German bond interest rates widened to 50 basis points, resulting in serious LTCM arbitrage losses.
1August 1998, LTCM's fund * * * lost 44%, of which 82% was caused by arbitrage.
(5) Wrong direction transaction
Trading is more based on judgment, and wrong direction judgment will lead to fatal mistakes.
Example 4: LTCM predicts that the high interest rate in Denmark will fall after the euro integration. If you buy Danish mortgage securities in advance, you can get capital gains from rising prices. After the Russian ruble incident, international investors demanded higher internal rate of return, which led to huge losses in Danish bond positions. Example 5: LTCM expected the US interest rate to rise and the bond price to fall, so it adopted the strategy of short selling US bonds. However, due to the Asian financial turmoil, the Federal Reserve lowered interest rates and bonds rose, which led to LTCM short selling bonds and huge losses.
4. The Federal Reserve's technical methods and warnings
1. The Federal Reserve extended a helping hand.
The huge loss of LTCM has seriously affected many financial institutions, so the Fed must try to solve this problem. In the history of asset management, almost no fund has lost almost all its capital like LTCM, and its debt is even more than that of many countries. The company's accumulated debt is as high as $80 billion, and it has signed complicated contracts with banks and brokers, so no one can accurately calculate the scale of its derivative debt, and some even estimate that its accumulated debt may be as high as 1 trillion dollars. Therefore, Peter Fisher, vice president of the Federal Reserve, held a meeting at his headquarters in Liberty Street, new york on September 22nd. The participants included the heads of major financial institutions such as travelers, UBS, Merrill Lynch and J.P. Morgan. As a result, everyone finally agreed to rescue the banking group composed of 16 companies and agreed to increase the capital of LTCM by $3.625 billion to avoid its bankruptcy.
The following is the running record of 1998 in September:
(1) 65438+1At the beginning of September, 1998, (2) LTCM Company called Mc Donough, an official of the Federal Reserve, and (3) stated its difficulties.
(4)1September 998 18, (5) LTCM was unable to obtain the required funds;
LTCM called Mike Donovan, a Fed official, and asked him to arrange a meeting.
Mcdonough contacted Federal Reserve Chairman Alen Greenspan and US Treasury Secretary robert rubin.
(6)1September 20th, 998, (7) Peter Fisher, an official of the Federal Reserve, led a delegation to visit the headquarters of LTCM, and (8) considered the impact of the potential liquidation of LTCM on the market.
(9) September 22nd morning 1998.
Peter Fisher meets with Goldman Sachs, Merrill Lynch and JPMorgan Chase? Then UBS joined the discussion;
After evaluating the impact of liquidation on the market, investment banks were forced to rescue them;
1night of September 22, 998
The four major brokers met at the new york Federal Reserve to discuss the rescue plan;
13 The broker then held a meeting. Notify LTCM to get ready? Documents.
(10)1On September 23rd, 1998, (1 1) LTCM received a capital increase of US$ 3.625 billion. (12) Mc Donough claimed that this was the only way to avoid fund bankruptcy and global stock market crash.
2. Enlightenment from 2. LTCM
Revelation 1: Banks save themselves instead of others.
What will happen if no one comes forward to save LTCM and let it go bankrupt? First of all, LTCM must be forced to sell its assets to repay the losses, and this practice should be extended to all people who deal with LTCM. So it will inevitably lead to a sharp drop in the prices of these assets. So other investors (such as banks, hedge funds, etc. Investors holding the same portfolio as LTCM will suffer losses due to the shrinking value of these assets. Finally, all legal persons who borrow money from LTCM and their trading partners will also face bankruptcy threats because of the collapse of LTCM. The rescue of LTCM is actually a self-help plan that banking institutions have to make.
Enlightenment 2: Defects of measurement management tools
LTCM's investment strategy is still excellent, and the "luck" problem caused by the ruble incident makes its losses difficult to control. However, in its tactical application, in order to maximize profits, it even buys wealth management products with poor liquidity while operating with high leverage. Although price risk can be analyzed by software, credit risk and liquidity risk are difficult to evaluate. When liquidity risk appears in the whole market, the original corresponding hedging strategies are all obliterated by credit risk and liquidity risk.
From Russian Economic Collapse to the Decline of LTCM
From Russia's economic collapse to the decline of LTCM, these seem to be two unrelated things. Recently, when several friends rearranged their thoughts, they found an amazing connection. We have to come to the conclusion that everything is an American conspiracy, which surprised all of us. The surprising conclusion is not that it once again exposes the United States' efforts to defeat the enemy in order to maintain hegemony, but that the plot is really too big.
The full name of LTCM is Long-term Capital Management Company. Together with Quantum Fund, Tiger Fund and Omega Fund, it has been called the four international "hedge funds". And his management is even more eye-catching. Maybe you don't know these names. But how do you feel when you just read this title: Merry Vekhter, the father of Wall Street debt arbitrage; Robert Merton and Miloon Scholes, former US deputy treasury secretaries and vice-chairmen of the Federal Reserve; and Rosenfeld, former head of salomon brothers's corporate bond trading department.
Under the leadership of such a "dream team", LTCM has created brilliant achievements. At the beginning of the establishment of 1994, its net asset value was only125 billion US dollars, but by the end of 1997, it had risen to 4.8 billion US dollars. The net growth reached 2.84 times. The return on investment from 1994 to 1997 is 28.5%, 42.8%, 40.8% and 17% respectively. Even 1997, the dividend of every dollar in the stock market reached 2.82 dollars.
However, this brilliant financial imperialism collapsed in a flash. 1998, LTCM bet on the price convergence of 30-year treasury bonds and 29-year treasury bonds in the United States (short selling the former and buying the latter), believing that no matter how the price fluctuates, it is a shoo-in. Unexpectedly, the financial crises in Asia and Russia led frightened investors to flock to the 30-year bonds that seemed safer and more auspicious. As a result, the prices of 30-year bonds and 29-year bonds diverged rather than converged. Several other similar "convergence transactions" also ended in disagreement, so the famous hedge fund "long-term capital" had to resort to the "soft budget constraint" of the Federal Reserve to avoid bankruptcy and trigger a global financial crisis. 1In the autumn of 998, LTCM was in danger. LTCM thinks that the price difference between high-risk stocks and low-risk stocks will be reduced, and it has increased the intensity of gambling. However, contrary to expectations, affected by the Russian debt crisis, the price difference between the two has not decreased, but has increased. In August, the value of various stocks held by LTCM fell by 44%, worth about $2 billion. On September 13, LTCM's equity capital of $4.3 billion was almost completely lost. On September 23rd, the Federal Reserve made an arrangement, and 15 international financial institutions headed by Merrill Lynch and Morgan invested $3.725 billion to buy 90% equity of LTCM, and * * * took over the company, thus avoiding its bankruptcy.
Maybe we can blame everything on risk. Blaming hedge funds can only be regarded as speculation rather than investment. I even use the example of Bahrain Bank to comfort myself, but it is not difficult for us to find some subtleties worthy of our interest in the rise and fall of LTCM.
The success of LTCM is based on a formula, which is Black-Scholes formula. Broadly speaking, this formula sets the tone for the whole financial derivatives trading, trying to systematize, quantify and rationalize the analysis and trading of financial derivatives. This seemingly excellent formula also won his founder the Nobel Prize in Economics from 65438 to 0997, but a problem immediately confronted us. This is speculation and gambling. When the outcome of gambling is predictable, the value of gambling itself will be greatly reduced. A friend's words made me suddenly realize: "Why did Greg (Federal Reserve Chairman Alan Greenspan) let them make mischief without stopping it?" This is not just a non-stop. At that time, Ms. Bonn warned about the risks of over-the-counter trading, but Greenspan and Levitt (then chairman of the US regime trading center) kept asking Ms. Bonn to remain silent on the grounds that the market had been fully regulated. You know, this Ms. Bonn is no ordinary person. In addition to serving as the chairman of the US Commodity Futures Fair, she, Greenspan, Levitt and US Treasury Secretary Rubin all served in the President's Financial Working Group. Why did Ge Lao do this?
With this question, let's look at the Russian economy. With the disintegration of the Soviet Union, the huge empire disappeared on the earth and gradually evolved into a "former" word in history books. American economists once proudly said that we deprived a big country of its freedom of action without firing a shot. Yes, the Russian economy has experienced the pain of shock therapy, and it is indeed time for reflection. Ukraine's independence allowed Russia to be dug into Europe. The backbone from St. Petersburg to Moscow, the right heart of Ural Industrial Zone, supports Russia, the sick man of Europe. At this time, foreign exchange has become the core of all economic activities. Compared with Southeast Asian countries, it can shout such a slogan: "Sacrifice the youth of local girls in exchange for the rapid development of the national economy", which is tantamount to a drop in the bucket for Russia. 1when the economy gradually improved in mid-1997, Russia absorbed a huge amount of foreign investment. Foreign countries hold more than $200 billion in debts and stocks to Russia, among which the main creditors are banks in Germany, Switzerland and the United States. At that time, the foreign debt owed by the Russian government exceeded130 billion US dollars, and it was 60 billion US dollars in the short term. Just paying interest will cost more than $20 billion a year. But foreign exchange is hard to say.
According to records, at that time, 80% of Russia's foreign exchange sources came from the export of weapons and oil. The former is a special product for obvious reasons. Its export scale is greatly influenced by changes in the international political situation, and selling resources is not a long-term solution. We can't imagine the pain that Russia's oil industry is still struggling under such circumstances. We should know that the cost of oil exploitation in Russia has also reached $ 12 to $ 18 per barrel, which means that Russia's current oil export price should be higher than $25 per barrel to make a profit, while the average price of crude oil in the Organization of Petroleum Exporting Countries (OPEC) dropped to $ 14.69 per barrel in 1998. It is more than $6 lower than the internal reference price of 2 1 USD per barrel set by the organization. Russian industry is finished. 1.996, Russia's oil production hit a record low of 3 1 10,000 tons, even compared with 5 1.99 1 year, it was pitiful.
Under such circumstances, there is news to attack Russia, and Americans claim that oil prices may fall further. It was like a bolt from the blue. However, it seems that Americans have foresight. In the first half of the year, the weighted average price of international crude oil was only 7 17.58 yuan/ton (excluding tax), which fell below $0.2 per barrel. Russia's crude oil price of $0.2 per barrel/kloc could not even meet the minimum grain import at that time. Only China urgently exports agricultural products to Russia for humanitarian and geopolitical reasons.
An empire that was once so rampant was pushed into this field. How can I not let my close friend cry? In addition, perhaps this empire saw the flame of revival in 1997.
From 1997 to 1998, with the goal of Russian economic collapse, we clearly found many "coincidences": when Russia needed foreign exchange most, international crude oil prices fell again and again; Arms exports have also been repeatedly hindered by various factors. On June 65438+1October 065438+1October 0 1, the Russian new ruble began to circulate. 65438+1at the end of 0, the financial situation of the Russian government deteriorated sharply because the world oil price continued to fall. In order to make up for the fiscal deficit, the scale of national debt issuance expanded rapidly, which led to another round of decline in the stock market and bond market, followed by a great devaluation of the currency. Looking back, we can see how many inextricably linked the establishment of 1994 LTCM and the collapse of 1998 ruble. At that time, Russia was short of foreign exchange, oil and weapons, so it could not make money. So Americans put a speculative company set up with a "perfect" formula in front of him, which is gambling in itself, but now gambling is a shoo-in, and no one will be tempted, let alone people who are short of money. But I want to ask, this game of the world financial market. Who manipulated the financial crisis? Who can manipulate oil prices? Does anyone still doubt that this is just a coincidence?
LTCM lost. On the surface, he lost when there was a loophole in the theory and a small probability event occurred, that is, when the gambling prediction failed. But why did the U.S. government know that there was a loophole in the theory and the company would die one day, but didn't stop it? There is a simple reason. Poor LTCM was a bait to attract Russia from the beginning, and it absorbed Russia's poor last dollar reserve with attractive expectations. When the ruble collapsed, LTCM was valuable.
We even have reason to doubt Ms. Bonn's warning, because as a conspiracy, this plan to collapse the Russian economy is so huge that Ms. Bonn, as a financial adviser to the President of the United States, can't be unaware of it. Her warning is nothing more than to prove the innocence of herself and the US government.
1On September 30, 1998, US President Bill Clinton announced that in the fiscal year of 1998, which ended on September 30 this year, the US federal government is expected to have a surplus of about 70 billion US dollars. This is the first time that the US government has achieved a fiscal surplus since 1969. I wonder how much of this is the blood and sweat of people in other countries.