Eckstein's International Trade Case Analysis

“I got a great trade, but I can’t stay in it “, Eckstein pleaded with them. Eckstein traded in T-bill futures. They often traded at a slight discount to the price of the actual. Eckstein would buy the futures , sell the bills , and wait for the two prices to converge , and he trade in the secret of Eckstein’s business of long term capital future business .Eckstein didn’t care about volatile of price , but interest about how the two prices would charge relative to each other . Eckstein would expect to make money on one trade and lose it on the other. Eckstein’s profit on his winning trade would be greater than his loss. (This is basic idea of arbitrage) . In June 1979, futures got more expensive than bills. The gap widened even further. Eckstein

For each investment, it’s enough to know that long term was chiefly concerned with two questions: what was the anticipated average return, and how much did the return in any typical year tend to vary from the average.

Meriwether’s traders were concerned with limiting risk. The idea that they could do so by targeting specific level of volatile was central to how they ran the fund. If the portfolio was a little too quiet, they’d borrow more , raising the “vol” , if it was to volatile , they’d reduce their leverage , coming the fund down .

If you follow the market, you have a gut feeling that stocks or bonds are often inexplicably volatile. Economists later figured that, on the basis of the markets historic volatility, had the market been open every day since the creation of the universe, the odds would still have been against its falling that much on any single day.

In 1998, long term began to short large amount of equity volatile. “Equity vol” as long term signature trade, it comes straight from the black scholar model, it based on the assumption that the volatility of stock is consistent. There is no stock as “equity

If you knew the price of an option you could infer the level of volatility of the market was expecting. Long term de deduced that the option market was anticipating volatility in the stock markets roughly 15 %. Long term began to short option, specifically, option on the standard and poor’s 500 stocks index. So, the professors were “selling volatility”. The buyers of option were equity investors who wanted insurance against a market decline. They were willing to pay a small premium against the risk of a crash. In fact, it sold insurance (optional) against a sharp downturn or a sharp