In economics and finance, arbitrage is the practice of taking advantage of a difference in prices in two or more markets – striking a combination of matching deals to capitalise on the difference, the profit being the difference between the market prices at which the unit is traded. When used by academics, an arbitrage is a transaction that involves no negative cash flow at any probabilistic or temporal state and a positive cash flow in at least one state; in simple terms, it is the possibility of a risk-free profit after transaction costs. For example, an arbitrage opportunity is present when there is the possibility to instantaneously buy something for a low price and sell it for a higher price.
Long-Term Capital Management L.P. (LTCM) was a highly leveraged hedge fund. In 1998, it received a $3.6 billion bailout from a group of 14 banks, in a deal brokered and put together by the Federal Reserve Bank of New York.
Robert Cox Merton is an American economist, Nobel Memorial Prize in Economic Sciences laureate, and professor at the MIT Sloan School of Management, known for his pioneering contributions to continuous-time finance, especially the first continuous-time option pricing model, the Black–Scholes–Merton model. In 1997 Merton together with Myron Scholes were awarded the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel for the method to determine the value of derivatives.
Myron Samuel Scholes is a Canadian–American financial economist. Scholes is the Frank E. Buck Professor of Finance, Emeritus, at the Stanford Graduate School of Business, Nobel Laureate in Economic Sciences, and co-originator of the Black–Scholes options pricing model. Scholes is currently the chairman of the Board of Economic Advisers of Stamos Capital Partners. Previously he served as the chairman of Platinum Grove Asset Management and on the Dimensional Fund Advisors board of directors, American Century Mutual Fund board of directors and the Cutwater Advisory Board. He was a principal and limited partner at Long-Term Capital Management (LTCM), a highly leveraged hedge fund that collapsed in 1998, and a managing director at Salomon Brothers. Other positions Scholes held include the Edward Eagle Brown Professor of Finance at the University of Chicago, senior research fellow at the Hoover Institution, director of the Center for Research in Security Prices, and professor of finance at MIT's Sloan School of Management. Scholes earned his PhD at the University of Chicago.
Union Bank of Switzerland (UBS) was a Swiss investment bank and financial services company located in Switzerland. The bank, which at the time was the second largest bank in Switzerland, merged with Swiss Bank Corporation in 1998 to become UBS. This merger formed what was then the largest bank in Europe and the second largest bank in the world.
In finance, a haircut is the difference between the current market value of an asset and the value ascribed to that asset for purposes of calculating regulatory capital or loan collateral. The amount of the haircut reflects the perceived risk of the asset falling in value in an immediate cash sale or liquidation. The larger the risk or volatility of the asset price, the larger the haircut.
John William Meriwether is an American hedge fund executive.
Liquidity risk is a financial risk that for a certain period of time a given financial asset, security or commodity cannot be traded quickly enough in the market without impacting the market price.
Large and complex financial institutions (LCFI) is a polite term for the bulge bracket banks. The context is that of systemic risk, a topic of particular concern to central banks, financial regulators and the Bank for International Settlements.
A dual-listed company or DLC is a corporate structure in which two corporations function as a single operating business through a legal equalization agreement, but retain separate legal identities and stock exchange listings. Virtually all DLCs are cross-border, and have tax and other advantages for the corporations and their stockholders.
Limits to arbitrage is a theory in financial economics that, due to restrictions that are placed on funds that would ordinarily be used by rational traders to arbitrage away pricing inefficiencies, prices may remain in a non-equilibrium state for protracted periods of time.
When Genius Failed: The Rise and Fall of Long-Term Capital Management is a book by Roger Lowenstein published by Random House on October 9, 2000. The book tells an unauthorized account of the creation, early success, abrupt collapse, and rushed bailout of Long-Term Capital Management (LTCM). LTCM was a tightly-held American hedge fund founded in 1993 which commanded more than $100 billion in assets at its height, then collapsed abruptly in August and September 1998. Prompted by concerns about LTCM's thousands of derivative contracts, in order to avoid a panic by banks and investors worldwide, the Federal Reserve Bank of New York stepped in to organize a bailout with the various major banks at risk.
The Russian financial crisis began in Russia on 17 August 1998. It resulted in the Russian government and the Russian Central Bank devaluing the ruble and defaulting on its debt. The crisis had severe impacts on the economies of many neighboring countries.
A flight-to-liquidity is a financial market phenomenon occurring when investors sell what they perceive to be less liquid or higher risk investments, and purchase more liquid investments instead, such as US Treasuries. Usually, flight-to-liquidity quickly results in panic leading to a crisis.
In financial economics, a liquidity crisis is an acute shortage of liquidity. Liquidity may refer to market liquidity, funding liquidity, or accounting liquidity. Additionally, some economists define a market to be liquid if it can absorb "liquidity trades" without large changes in price. This shortage of liquidity could reflect a fall in asset prices below their long run fundamental price, deterioration in external financing conditions, reduction in the number of market participants, or simply difficulty in trading assets.
JWM Partners LLC was a hedge fund started by John Meriwether after the collapse of Long-Term Capital Management (LTCM) in 1998. LTCM was one of the most spectacular failures of Wall Street, leading to a bailout of around $4 billion that was provided by a consortium of Wall Street banks. Meriwether started the company with initial capital of $250 million with loyal quants and traders like Victor Haghani, Larry Hilibrand, Dick Leahy, Arjun Krishnamachar and Eric Rosenfeld. As of April 2008, the company had around $1.6 billion in management. Eric Rosenfeld left to start his own fund.
Victor Haghani is an Iranian-American founder of Elm Wealth, a research-driven wealth advisor and manager. Elm uses index-tracking funds to invest across the largest asset classes and tries to give its clients broad exposure to global economic growth at the lowest possible cost.
David Wiley Mullins Jr. was an American economist who served as the 14th vice chairman of the Federal Reserve from 1991 to 1994. Prior to his term as vice chairman, Mullins served as a member of the Federal Reserve Board of Governors, taking office in 1990. Before his appointment to the Federal Reserve, he served as the under secretary of the treasury for domestic finance under President George H. W. Bush. Mullins left the government service to join the hedge fund Long Term Capital Management and remained in private finance following its collapse in 1998.
Fixed-Income Relative-Value Investing (FI-RV) is a hedge fund investment strategy made popular by the failed hedge fund Long-Term Capital Management. FI-RV Investors most commonly exploit interest-rate anomalies in the large, liquid markets of North America, Europe and the Pacific Rim. The financial instruments traded include government bonds, interest rate swaps and futures contracts.
A financial network is a concept describing any collection of financial entities and the links between them, ideally through direct transactions or the ability to mediate a transaction. A common example of a financial network link is security holdings, where a firm's ownership of stock would represent a link between the stock and the firm. In network science terms, financial networks are composed of financial nodes, where nodes represent financial institutions or participants, and of edges, where edges represent formal or informal relationships between nodes.
