Question

Which of the following risk factor is not among the factors that lead to the crash of Long Term Capital Management hedge fund?

	A.	Model risk
	B.	Liquidity risk
	C.	Market risk
	D.	Cyber risk

Which of the following is NOT true?

	A.	Futures contracts are traded on exchanges, but forward contracts are not.
	B.	Delivery or final cash settlement usually takes place with futures contracts; the same is not true of forward contracts.
	C.	Forward contracts usually have one specified delivery date; futures contract often have a range of delivery dates.
	D.	Futures contracts are standardized; forward contracts are not. CME Group oats futures trade with March, May, July, September, December as a delivery months. Blue Lake Inc. is hedging the purchase of oats in October. Which futures contract should it use? A. The September contract B. The July contract C. The March contract D. The December contract

Answer 1

PART 1

Correct option would be option D. as cyber risk does not has prolonged effect on the long term capital management hedge fund, it might cause disturbtion and loss of critical data but will not lead to crash of the LTCM hedge fund.The rapid rise of the internet as the preferred method to transact and share information has exposed individuals and institutions to cyber risk.

• Model Risk :  It is a type of risk that occurs when a financial model is used to measure quantitative information such as a firm's market risks or value transactions, and the model fails or performs inadequately and leads to adverse outcomes for the firm and thus this can lead to crash of LTCM if not quantitiative information is not valued properly.
• Liquidity risk refers to the possibility that a institution could find itself unable to settle obligations with immediacy. This could be change in market condition effected by change in demand and supply. This lead to crash in the market. e.g Lehman Brother's case.
• Market risk is the possibility of an investor experiencing losses due to factors that affect the overall performance of the financial markets in which he or she is involved. Market risk, also called "systematic risk" cannot be eliminated through diversification or other means. Sources of market risk include recessions, political turmoil, changes in interest rates, natural disasters and terrorist attacks thus, this can lead in the crash of LTCM. Systematic, or market risk tends to influence the entire market at the same time. e.g. 2008 recession, 2020 COVID 19 crisis.

PART 2

Option B is not true as futures contracts are marked-to-market daily, which means that daily changes are settled day by day until the end of the contract. Furthermore, a settlement for futures contracts can occur over a range of dates. Thus in futures there is fixed delivery or final cash settlement.

PART 3

Correct option here is december contract as delivery month designates when the contract expires, and when the underlying asset must be delivered or settled. Thus to hedge the risk of a purchase in the month of october , a december contract is needed to hedge upon as all other contracts such september , July , March has preceeded the month of october and it's delivery date has expired , so these contracts cannot be used to hedge the risk.