Explain why this trade accounted for such a large amount of losses incurred by LTCM in the summer of 1998
Please use Petrozuata uploaded case and answer this question according to instructions given :
(1) Using the XL spreadsheet for the project develop your own scenario/future state of the world and the funding package that you recommend Petrozuata should aim for.
Each team will submit a one page summary recommendation on this last question # 4 using the spreadsheet as a decision tool and stating clearly the scenario that you relied on (and its rationale) as well as the numerical results that you derived from the spreadsheet.
Please read the chapter on Long-term capital management of the Book: Global Derivative Debacles : from Theory to Practice by Laurent L.Jacque .
Please answer Only ONE QUESTION IN THE LISTED:
#1 Explain the differences between relative value, convergence and directional trades
#2 Referring to swap spread trades identify the nature of risk(s) taken on by LTCM. Explain why this trade accounted for such a large amount of losses incurred by LTCM in the summer of 1998
#3 Would you characterize LTCM volatility trades as convergence or directional trades?
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