00:01
One of the high -profile bankruptcies attributed to derivative trading is the collapse of long -term capital management in 1998.
00:30
1998, ltcm that is long term capital management was a highly renowned hedge company founded by nobel prize winning economists and experienced traders.
00:42
So the collapse of ltcm shares some similarities with the baring bank collapse but also exhibit distinct differences.
00:52
So let us see why what is the event that leads to the collapse so it's that lead to the collapse of ltcm was ltcm's collab was primarily triggered by because it was heavily rely on complex financial derivatives and highly leveraged position the firm engaged in arbitrary strategies that involved taking advantage of small price discrepancies in the price of similar asset.
01:29
Also, they use high level of leverage to amplify their returns on these trades.
01:35
Also, a series of global events, such as russian financial crisis and the devaluation of the russian ruble led to significant market turmoil.
01:46
The market volatility caused ltcm's highly leveraged position to deteriorate rapidly, resulting in massive losses that exceeded the firm's capital.
02:02
Ltcm has some of the similarities to baring bank, such as derivative dependence.
02:09
Both baring bank and ltcm were heavily involved in trading derivatives.
02:14
Baring bank's collab was linked to unauthorized speculative derivatives trading by a single individual, nick leeson, which led to enormous losses.
02:24
Similarly, ltcn's reliance on complex derivatives contributes to its downfall.
02:31
Next similarity is risk management failure.
02:35
In both cases, risk management mechanisms failed to prevent catastrophic losses.
02:41
Baring banks failed to establish proper oversight and controls allowing unauthorized trading to go unnoticed.
02:50
Similarly, ltcm advanced risk management models did not adequately account for the extreme events that occurred in 1998...