Manhattan, Chase Tower, Top Floor.

"Two professors, we've lost 0.85 percent in the fourth quarter! And we've got $4 billion in Rakshasa in between!" John Merryweather, president of Long Term Capital Management (LTCM), walked around his office in frustration.

Myron Scholes, a professor at Stanford University's graduate school of business and a recent winner of the Nobel Prize in Economics, lit a cigar and glanced at his old partner, Robert Morton, who was also a '97 Nobel laureate in economics.

It is precisely because of the two golden signs of Scholes and Morton, as well as the addition of David Mullins, the former vice chairman of the Federal Reserve, that Long Term Capital Management has grown into one of the top hedge funds on Wall Street in just two years. It is precisely because of the application of Scholes and Morton's Nobel Prize-winning BS formula to the business of long-term capital management companies that LTCM can be proud of Wall Street with an investment return of more than 40% and become the darling of the financial industry, thereby obtaining more than 30 times the leverage ratio and leveraging the entire world economy.

Unlike academics who serve as nominal directors in firms, Scholes and Moreton are genuinely involved in the investment business.

Almost every fund of LTCM is operated by these two Nobel laureates to ensure the effectiveness of the BS formula.

Of course, Scholes has also been rewarded handsomely. Over the past two years, he has earned more than $200 million in operating earnings from the company, making him one of the richest Nobel laureates.

"The results of the VaR test show that unless the Rakshasa defaults on its debt, it is all within our pressure range. Myron Scholes looked calm, "John, you've been getting more and more irritable lately, and it's better to eat less 'nutrition', which is not a good thing." ”

Var is the abbreviation of Value at Risk, which means Value at Risk, which is a type of risk model used to test the risk pressure of the financial industry.

This approach has only been around for a few years, and LTCM is the first hedge fund to introduce the VaR test. In practice, VaR does avoid a lot of potential losses for LTCM.

Unlike Soros's Quantum Fund, Merrywether's LTCM does not care about the political issues of Rakshasa and does not make direct investments in Rakshasa but mainly focuses on arbitrage trading of Rakshasa short-term bonds.

To put it simply, it is to find the interest rate difference between different short-term bonds in the Rakshasa market through the BS formula, buy low and sell high, trade frequently, and make a profit.

This mode of operation is not very risky because of the fast flow speed. Moreover, the Rakshasa bond market was actively traded before, which also allowed LTCM to make a lot of money from it.

Meriweather loosened his tie rudely, took two small pink pills from the drawer of his desk, threw them into the water, and drank them all.

"Profit, I want to make a profit!" Merry Weatherer gasped, "3527% leverage, if we don't make a profit in a quarter, it's over!"

In the field of hedge funds, LTCM is currently the only one that has maintained a leverage ratio of 30 times and can continue to be sought after by the market.

LTCM is a typical inverted pyramid asset structure, with the core assets of only $5 billion, which is invested by large bank consortiums such as UBS and Merrill Lynch in addition to the initial partners' contributions. Through layers of mortgage borrowing and other means, LTCM obtained $140 billion in assets with 30 times leverage. And these $140 billion in assets have become $1.25 trillion in financial derivatives through layers of packaging.

Currently, LTCM's $1.25 trillion swap position accounts for 5% of global financial markets, and the sheer size of its assets is staggering.

In other words, it is not unusual for LTCM to use $1.25 trillion to make money on $5 billion in core assets, with outrageously low financing costs and an actual profitability of more than 100%.

In fact, because LTCM has no disclosure obligation, its asset size is not known to the public, and the profits earned in this way are several times the return on investment, which are transferred to the hands of various capital institutions behind the scenes, becoming a cornucopia of these large institutions.

It's not that no one has questioned LTCM's financing, and a Wall Street Journal reporter once directly questioned Myron Scholes, saying that it is impossible to make so much money with $5 billion to $7 billion in assets. Myrlens Scholes actually grabbed it in the air with his hand and said, "We're a vacuum cleaner and we've sucked up all the coins you can't see."

This kind of answer has basically singled out the ulterior operation mode behind LTCM, and Myron Scholes dares to say this, which shows that the depth of LTCM's background has reached the level of unscrupulousness.

"Real estate bonds are losing money, M&A arbitrage is also losing, and now even the Rakshasa market, which has always been active, is also starting to lose money, and in the past two months, our return has fallen to -0.87%, and I now doubt that the BS formula is still in effect. Merryweather, who had taken the pills, questioned Myron Scholes.

"The BS formula is impossible to fail. Morton took over the conversation and said categorically, "At present, the global market is at a low ebb, and other hedge funds are losing money, this is just a small black swan event." Our $4 billion in Rakshasa is not a high percentage, and even if we lose 20 percent, it will not have much impact on us, and it is still within the scope of VaR testing. On the other hand, the quantum fund, due to too much direct investment, must have suffered heavy losses this time, and our return this year will still far exceed theirs. ”

Morton's confidence is not groundless, unless the Rakshasa government suddenly declares a debt default and bans the flow of bonds, even if LTCM loses in the Rakshasa it is unlikely to lose much, and it will not have a very serious impact.

As for whether the Rakshasa government will declare a default on its debts, this is hardly on the radar of him and Scholes.

Who would have made such a decision if the consequences of a default were so severe that the Rakshasa would not be able to gain the trust of international capital and the gains of eight years of economic reform would be ruined?

"However, I agree to withdraw from the rakshasa gradually. Myrence Scholes crossed his legs, "At present, our strategy should be based on wait-and-see, gradually narrowing the position of Rakshasa, the previously passed AST will land on January 1st, I have carefully studied it, and there are many doorways in it." Recently, Colin Paulson and I were discussing the possibility of using computers for quick arbitrage. I think this may become a new profit point for us in the future. ”

Morton had never heard Scholes talk about this topic, and he couldn't help frowning: "Fast arbitrage with computers?"

Myrlens Scholes slowly exhaled a puff of smoke, "It's very simple, it's to hand over what we're doing now to the computer, and let the computer automatically carry out arbitrage trading through models and algorithms." The transaction speed of computers is tens of thousands of times faster than that of human labor, and Colin's team and I both believe that as long as the computing speed is fast enough, it is completely possible to monopolize fast arbitrage. ”

Morton touched the corner of his forehead: "Wait, I seem to have heard of this pattern." ”

The previous chapter was 404.,I'm appealing.,See if it won't be unblocked tomorrow.。