appendix8-3.pdf

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1、The story of LTCM would be incomplete without mentioning the UnionBank of Switzerland (UBS)LTCM warrant fiasco. The warrant surfaced in anumber of different forms, as LTCM tried to twist the arms of financial insti-tutions like Chase, Bear Stearns, and Merrill Lynch to accept it; but, theterms were

2、rejected. The risk was just too big compared to the premiumLTCM was willing to pay. Nevertheless, in June 1997, UBS, under the lead-ership of Mathis Cabiallavetta, agreed to the terms of a newly devisedoption in return for a moderate premium and entre to LTCMs growingbusiness.LTCM paid a premium of

3、$289 million to UBS, and in return got a seven-year call option that paid the equivalent return of an $800 million invest-ment in LTCM. Unhedged, the losses to UBS could be enormous, especiallyif the LTCM continued its stellar performance. Exhibit A8.3.1 shows UBSposition after it sold the call opti

4、on to LTCM. Notice how $289 million (plusaccumulated interest) was the most UBS could earn, and after the $800 mil-lion notional investment reached $1,089 million, UBS losses began.UBS realized its vulnerability and tried to hedge this option by investing$800 million in LTCM. The bank also invested

5、in LTCM $266 million of its$289 million premium, thereby increasing its LTCMexposure to $1,066 mil-lion. It would be wrong to get the impression that UBS original $800 millionAppendix 8.3UBS and the LTCM Warrant Fiasco2004006008001,0001,4001,6001,2001,0895782892895780LTCM Portfolio ValueProfitsDolla

6、rsLossesExhibit A8.3.1UBS Position After It Sold LTCM the Call OptionA.8.3.1UBS and the LTCM Warrant FiascoA.8.3.2investment was a hedge and only the $266 million supplemental investmentwas speculative. As Exhibit A8.3.2 shows, UBS investments were betsthat LTCMs performance would continue to be str

7、ong. Combining UBSshort call (see Exhibit A8.3.1) with its long cash position in LTCM created ahybrid with the shape of a short put (see Exhibit A8.3.2). As a result, UBSwas vulnerable to any downturn in LTCMs performance.When LTCM failed, UBS position deteriorated, and in October 1998, itwas forced

8、 to write off $678.5 million. CEO Mathis Cabiallavetta and threeother top executives at UBS were forced to resign, and Marcel Ospel, formerCEO at Swiss Bank Corporation, took over at the helm of UBS.A.8.3.3APPENDIX 8.3: UBS and the LTCM Warrant Fiasco57828902892004006008001,0005788006004002002004006

9、008001,0000600200008004002004006008001,0002004006008001,0001,400 1,6001,20069161253345437529621 231156504502508501,4501,2501,0501: Short Call2: Long Position in LTCM+3: Combined Position: Hybrid4: Short Put1,400 1,6002746701,0661,4621,200ProfitsLossesProfits/LossesProfits/LossesProfits/LossesLTCM Portfolio ValueLTCM Portfolio ValueLTCM Portfolio ValueLTCM Portfolio ValueExhibit A8.3.2Profit-and-Loss Profiles: Short Call Plus a Long InvestmentPosition Equals a Short Put