I have posted a link to a video titled The Midas Formula (originally aired on NOVA) in the content section of the course for this week. Please watch it and answer the following questions:
- The main characters in the video, Myron Scholes & Robert Merton, are both Nobel Laureates. In the video, they discuss the founding of a hedge fund called Long Term Capital Management (LTCM) in 1994 which primarily utilized the option pricing model they created, the Black Scholes Option Pricing Model. What outside factors lead to the demise of the fund?
- Does the impact of the outside factors I referred to in 1 (above) lead you to any conclusions about globalization of financial markets? After watching the video, do you think that options are a viable tool for hedging risk?
- Could the bailout by the Federal Reserve in 1998 and subsequent closing of the fund in 2000 be seen as a precursor of the 2008 Bear Sterns bailout, Lehman Brothers failure, credit crisis and subsequent bank bailout?
- Please do some outside research on the LTCM failure. How were Henry Paulson, Jon Corzine, & Warren Buffet involved in the failure? Do you think that the involvement of Mr. Paulson had an impact on his actions as Treasury Secretary in 2008?
