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An Engine, Not a CameraHow Financial Models Shape Markets$
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Donald Mackenzie

Print publication date: 2006

Print ISBN-13: 9780262134606

Published to MIT Press Scholarship Online: August 2013

DOI: 10.7551/mitpress/9780262134606.001.0001

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(p.211) 8 Arbitrage
An Engine, Not a Camera

Donald MacKenzie

The MIT Press

This chapter examines the factors that led to the creation of the hedge fund Long-Term Capital Management (LTCM), along with its activities, and also examines the factors which created significant problems for the hedge fund in 1998. LTCM suffered from significant problems in 1998 when adverse price movements affected its activities and drove it to bankruptcy. A consortium of leading banks coordinated by the Federal Reserve Bank of New York helped to improve the prospects of the hedge fund amid the growing global economic crisis. The hedge fund trading involved the simultaneous purchase and sale of an asset to earn profits in financial markets, and focused on earning low-risk profits by exploiting the differences in prices. The chapter finds that the hedge fund faced significant problems as its activities involved risk and required moderate amounts of capital.

Keywords:   hedge fund, bankruptcy, consortium, economic crisis, financial markets

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