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Answer: The inability of leveraged LTCM to post collateral forced the close-out of positions at steep losses; but, if the positions could have remained open, LTCM could have survived.
Hull’s discussion of LTCM emphasizes that the fund’s problems were worsened by its inability to meet collateral demands. This led to **forced close-outs and steep losses**. A key point is that, had the positions been allowed to remain open long enough for markets to normalize, LTCM may have survived. The other options misstate the role of collateral or exaggerate claims about market practices at the time.
Author: Manit Arora
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Q-146.4 According to Hull,⁴ which is true about the role of collateralization (collateral requirements) agreements in the Long-term Capital Management (LTCM) case study?
A
LTCM was stuck with leveraged counterparties who could not post their collateral to LTCM, which created a liquidity crunch for LTCM
B
The inability of leveraged LTCM to post collateral forced the close-out of positions at steep losses; but, if the positions could have remained open, LTCM could have survived.
C
Prior to LTCM, there was neither widespread use of collateral nor ISDA standardization; the LTCM case prompted both growth in use and development of ISDA documentation
D
Contrary to popular wisdom, Hull asserts that collateral arrangement played almost no role (“de minimis”) in the LTCM case study
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