Multinational Finance NYU Stern跨国金融纽约大学斯特恩.pptVIP

International Fixed Income Topic 6B:LTCM (From last time)B. Peso Crisis By the end of 1993, the MP traded at 3.1/$ and was overvalued by PPP measures (3.5-4.1). [Managed float]. Mexico’s international reserves surged towards 30bn by year-end. In March, these reserves dropped 10bn when presidential candidate Colosio was assassinated. Mexico’s reserves were almost completely depleted through November 1994. December 1, the new president, Zadillo, took office and shortly after devalued the peso, letting it float freely. Mexico’s International Reserves Mexican Peso Mexican Peso Cetes Currency C. Russian Default By June 1998, the stock market was at a two-year low; and the gov’t failed to collect enough funds from T-bill auctions to repay outstanding debt. August was a bad month 3-mth moratorium on debt payments 50% devaluation of ruble halting of FX trading debt rescheduling that would lead to unprecedented losses September Liberal reformers resigned Russian stock market dropped over 45% Ruble Russia, $-denominated 3%, 2003 Outline for LTCM lecture Chronology of events Review one way of creating leverage in fixed income markets Examples Off-the-run versus on-the-run Trreasuries $ swaps versus Treasuries International government bonds International credit spreads Summary Chronology After being forced to leave Salomon in 1991, in wake of the Treasury auction rigging scandal, John Meriwether founded Long Term Capital Management in late 1993. There was an exodus from Salomon during this period, giving LTCM (sometimes called Salomon North) a “dream team” of traders/researchers in the fixed income area. LTCM’s “original” strategy was to take advantage of spreads between liquid and illiquid instruments in similar markets, and bank on a convergence of these securities - a so-called date with destiny. These strategies are highly levered because they are viewed as relatively riskless in the long run. In their first (shortened) year (1994), LTCM earned 20%, with staggering retur