| Investment Strategy | ||
| #1 | What was the name of the investment strategy that Charlie Ledly and Jamie Mai employed? |
Event-driven investing |
| #2 | Generally explain event-driven investing. |
Event-driven investing is an investment strategy that seeks to exploit pricing inefficiencies that may occur before or after a corporate event. |
| #3 | Was Charlie and Jamie's investment strategy guaranteed to always work? Why or why not? |
No, their investment strategy was a gamble that was sure to result in some losses and some successes. |
| #4 | Why were unsuccessful investments not a big deal in the investment strategy that Charlie and Jamie employed? |
The cost of the options for their unsuccessful investment were simply minute to the gains acquired in the other successful investments. |
| #5 | How did Ben Hocket explain the success of Charlie and Jamie's investment strategy? |
Ben believed that financial options were systematically mispriced, and the market often underestimated the likelihood of drastic moves in prices. |
| Building a Business | ||
| #1 | What was the name of the money management firm that Jamie Mai and Charlie Ledley started in 2003? |
Cornwall Capital Management |
| #2 | What was the name of the company that served as the ISDA for Charlie and Jamie's business? |
Deutsche Bank |
| #3 | What was the "hunting license" Charlie and Jamie needed in order to deal directly with big businesses such as Goldman Sachs and Bear Stearns? |
An ISDA |
| #4 | In what city did Charlie and Jamie start their company and where did they eventually move to? |
They initially started in Berkeley, California and later moved to New York City. |
| #5 | What was the starting amount of money for Charlie and Jamie's money management firm? |
$110,000 |
| Investments | ||
| #1 | What was the name of the company that Charlie and Jamie first invested in that resulted in the realization of their unique investment strategy? |
Capital One Financial |
| #2 | Describe one instance in which Charlie and Jamie's investment strategy proved unsuccessful. |
Convinced that there was going to be a coup in Thailand, they bought absurdly cheap options in Thai currency. The coup occurred, but the market didn't budge. OR Charlie found a price discrepancy in the market for gasoline futures so he quickly bought one gas contract and sold another to make a seemingly riskless profit. He then discovered that one was unleaded gas and the other was diesel. |
| #3 | Who, in particular, did Charlie and Jamie buy the credit default swaps from? |
Greg Lippmann |
| #4 | Name or describe two of the three companies that Charlie and Jamie first had success with using their unique investment strategy. |
Capital One United Pan-European Cable (UPC) A company that delivered oxygen tanks directly to sick people in their homes. |
| #5 | Why was $30 not the "right" price for shares of Capital One stock when Charlie and Jamie invested in the company? |
The company was either a fraud or it was honest. If it was a fraud, the stock was probably worth nothing. If it was not a fraud, the stock was worth around $60 per share. |
| Wall Street | ||
| #1 | Name three busniesses that could act as an ISDA for small investors like Charlie and Jamie? |
Goldman Sachs Deutsche Bank Bear Stearns Lehman Brothers J.P. Morgan UBS Morgan Stanley Merrill Lynch |
| #2 | What does a LEAP allow the buyer to do? |
It gives the buyer the right to buy a stock at a fixed price for a certain amount of time. |
| #3 | What was the primary error in the Black-Scholes option pricing model that Charlie and Jamie exploited in the Capital One investment? |
The Black-Scholes option pricing model assumed a normal, bell-shaped distribution for future stock prices. It did not account for scenarios in which stocks had a good chance of moving drastically in a short amount of time. |
| #4 | What does the acronym LEAP stand for? These are the derivative securities that Charlie and Jamie purchased in the Capital One investment. |
Long-Term Equity Anticipation Security |
| #5 | In the Black-Scholes option pricing model, what is the relationship between the length of the option and the validity of the results that Charlie and Jamie figured out? |
They realized that the longer the option, the more ridiculous the results generated by the model were. |
| Credit Default Swaps | ||
| #1 | What is the name of the man who played perhaps the most influential part in pitching the idea to buy credit default swaps on subprime mortgages? |
Greg Lippmann |
| #2 | What does CDO stand for? |
Collateralized Debt Obligation |
| #3 | What event would cause CDOs to collapse? |
If enough subprime loans deafulated, the CDOs would collapse. |
| #4 | Why did Charlie and Jamie buy credit default swaps on the double-A tranche of CDOs instead of the triple-B-rated bonds? |
They could pay 0.5% a year for insurance on the double-A-rated slice of the CDO instead of 2% a year on the triple-B-rated bonds. |
| #5 | What two specific traits were Charlie and Jamie looking for in CDOs? |
1. CDOs that contained the highest percentage of bonds backed by recent subprime mortgage loans. 2. CDOs that contained the highest percentage of other CDOs. |
| Final Question | |