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Inventing Money: the Story of Long-Term Capital Management and the Legends Behind It

by Nicholas Dunbar

  • ISBN: 9780471498117
  • ISBN10: 0471498114

Inventing Money: the Story of Long-Term Capital Management and the Legends Behind It

by Nicholas Dunbar

  • List Price: $38.00
  • Binding: Paperback
  • Publisher: John Wiley & Sons
  • Publish date: 12/01/2000
  • ISBN: 9780471498117
  • ISBN10: 0471498114
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Description: The collapse, in September 1998, of the highly secretive hedge fund (an investment fund acting in private for highly wealthy individuals and corporations) called Long-Term Capital Management is an incredible story. If the numbers involved were astonishing (LTCM controlled a portfolio of bonds worth $100 billion - 50 times what it had in cash - but it also owned 5% of the global interest rate swap market, together with numerous other derivatives with a notional value of $l trillion); the people involved were even more so: Robert Merton and Myron Scholes (both Nobel Prize winners for their work on option pricing), John Meriwether (the former vice-chairman of Salomon Brothers and one-time Wall St star of bond trading) and David Mullins (ex- Harvard Business School Professor and previously vice-chairman of the Federal Reserve). And yet even with all that financial expertise, in September 1998 it collapsed, making financial headline news across the world and requiring 14 investment banks to provide $3.6 billion in cash to stop the find going under and dragging each of them down as well.

Based on the highly sophisticated mathematical models developed by Merton, Scholes and their academic contemporaries 25 years previously, LTCM believed it could make risk-free profit by identifying mis-priced derivatives (however small) and trading in them. These modelling simulations introduced by Merton, Scholes et al. have been continually refined and developed by economists, physicists, maths PhD students over the next quarter century in attempts to increasingly "guarantee" profits - to "Invent Money". But the collapse of LTCM proves that this is not possible, even by the masters of the science.

Thecollapse of LTCM had a massive impact on the world markets and could, potentially, have been catastrophic, bringing down with it not only bank's and other financial institutions, but also whole economies. The faith that has been put into this system can be seen by the amount of money which was leant to LTCM and the degree of "copy-cat" trading that tumbled like dominoes when the collapse hit. In telling the incredible story of LTCM, Nick Dunbar also tackles a wider fundamental issue: the increasing dominance of the use of science in global financial markets - and addresses some key questions: how could such a huge hedge fund be allowed to put at risk the whole market? is more rigorous regulation required? even accepting the problems of LTCM, is there a valid argument that the reliance on modelling and mathematical formula actually creates a more stable, efficient and confident market by enforcing correct prices? or has the system evolved faster than we can understand? will the inevitable increase in electronic trading rule out a "human" element to the markets? is the global financial system more powerful now than its creators?

Through his explanation of the personalities, financial techniques and breakthrough innovations of LTCM, Nick Dunbar guides the reader on a rollercoster ride through the world of high finance, high profits, Nobel Prize winning science and apparently ultimate disaster.

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