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LONG TERM CAPITAL MANAGEMENT LP A CASE STUDYRarely if ever has a single firm had as tremendous an impact on international economics as Long Term Capital Management L P LTCM This report describes the company itself and its investment strategies with particular attention paid to its international influence and importance LTCMs activities in the financial world ultimately caused a near-collapse in the entire international financial system In fact had the Federal Reserve Bank of New York FRBNY not intervened to coordinate a major buyout of LTCM after it sunk into insolvency the entire financial system could have been seriously jeopardized Set up as a particularly large hedge fund and comprised of PhD economists and established Wall Street bond traders LTCM is a very interesting case as well as an extremely volatile and important fund Key Members and Their BackgroundsFounded in part by Nobel laureates Robert Merton and Myron Scholes LTCM based its investment strategies on the mathematical models developed by Scholes Merton and Fischer Black The model itself commonly known as the Black-Scholes Options Pricing Model is famous for two major insights into economic thought First the model determines how to eliminate risk as a variable in the option-pricing equation This was accomplished as a result of the second major insight which was the idea of using continuous time for option pricing as opposed to second-by-second timing a most crucial element that Robert Merton borrowed from a Japanese rocket scientist named Ito Discovering how risk can be eliminated from large-scale investing is obviously an enormous break-through that puts greed in peoples eyes and gets major investment players fighting for the chance to invest where the model will first be used in practice Integrating the notion of continuous time into the pricing model eliminated the problem of an appropriate option price being out-of-date by the time it was calculated As champions of these powerful tools Merton and Scholes decided to play the very financial markets that
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