Assignment

On the Topic

'' International finance Has Seen Many Crises [LTCM Crisis]”

Submitted By:

JeebanTamang

Roll No: 22225085

Subject: International Finance

MBA- 4th Trimester

Submitted To:

Mr. Krishna Bahadur Manandhar

Lecturer, MBA

Ace Institute of Management

New Baneshwor, Kathmandu

Date of Submission: February, 2023

International finance has seen many crises. One such crisis is known as LTCM crisis.

1. What is this crisis?

A financial crisis known as the Long-Term Capital Management (LTCM) crisis struck in 1998. It was a hedge
fund with the help of intention of taking more advantage of the pricing disparities that were established in the
international financial markets by various numbers of people with sharp brains, consisting of Nobel laureates
and financial specialists. Most of the range of financial products that can be utilized by using sophisticated
mathematical and statistical tools and intricate trading practices can be accumulated in substantial holdings in
different products such as derivatives, bonds, and currencies. LTCM shows the path for overall investors from
the entire world who want to invest their money as per the financial market situation. When the level of
LTVM’s represents the positive returns in terms of starting their investment, some of the biggest financial
institutions in the world began to invest their money in them. In August 1998, when the Russian government
stopped paying their debt due to various reasons, the fund’s demise came down suddenly and abruptly. This is
the critical condition regarding their default that sparked off a series of events that are totally converted into a
global flight to safety and liquidity, which indicates the reduction of asset values; it means the value of assets is
sharply reduced as much as possible, and it resulted in significantly big losses for LTCM.

2. What is the typical specialty of this crisis?

The LTCM crisis was a type of crisis that was threatened by the global financial monetary system at a certain
level and faced massive troubles. LTCM was able to make wagers on financial products such as those traded
with extreme leverage and derivatives. In the initial period, LTCM’s profit lost money in August 1998 from
their investment. Due to the worldwide flight to safety and liquidity that this event sparked, asset values fell
unconditionally. This refers to the fact that the Russian government was almost ready to stop paying its debt.
So, LTCM suffered big losses. Many investors blindly believed LTCM with their fund because of its complex
mathematical models and collective experience, which gave the fund an air of invincibility. But what really
stood out about LTCM was the size of its operations and the amount of leverage it possessed. The fund utilized
trading tactics that were very leveraged, which showed an unparalleled degree of gain and loss amplification.
This brilliant mind and bold risk-taking were part of the reason behind LTCM's quick ascent and, ultimately,
stunning collapse. The systemic consequences of the LTCM crisis for the global financial system were another
noteworthy aspect of the event. Due to LTCM's huge holdings of sufficient financial instruments and its
connections to other big financial institutions, there were substantial systemic risks associated with its failure.
LTCM experienced enormous losses upon the Russian government's debt default in August 1998, which set off
a series of forced liquidations and market disruptions. As a result of the market turmoil, authorities and central
banks intervened and planned a bailout to stop the crisis from getting worse. This incident showed how the
failure of a single institution has the ability to spread throughout the global financial system, underscoring its
interconnection and fragility.

3. Why this crisis is also called: When Genius Failed?

The LTCM crisis is also known as "When Genius Failed" because it involved a number of highly esteemed and
bright people who were unable to control the dangers associated with their trading techniques with their
knowledge. In spite of their knowledge and complex financial tools, the founders and management of LTCM
misjudged the possibility of market disruptions and the interdependence of international financial systems.
Similar to the 2008 financial crisis, subsequent occurrences like the market turbulence caused by the COVID-19
pandemic in 2020 and other incidents have shown how even experienced financial institutions and investors can
be caught off guard by unanticipated events and systemic dangers. A good example of the risks associated with
excessive risk-taking and reliance on complex financial instruments is the sufficient losses that large banks and
financial institutions sustained during the 2008 financial crisis as a findings of their exposure to subprime
mortgage securities. Similar to this, even with risk management strategies, many investors were caught off
guard by the COVID-19 pandemic's enormous economic disruptions and market volatility.