Question

What are the key steps for LTCM to earn very high returns from trading against small bond mispricing without being affected by market-wide interest rate changes?

First, buy illiquid assets; Second, short liquid assets at the same time. Third, use leverage. Fourth, dynamic hedging.
		First, buy illiquid assets; Second, hold those assets for the long term without trading.
		First, short liquid assets; Second, borrow money from investment banks to return cash to investors when investors have redemption demands.
		First, buy illiquid assets; Second, short liquid assets at the same time. Third, use leverage.

Answer 1

Answer-

The correct Option is first Option.

Key steps for LTCM to earn very high returns is to Long illiquid assets short liquid assets and then leveraging its positions, and to hedge its positions to reduce the fund’s volatility.

The other Options are incorrect.

The option 2 is incorrect as we have to short liquid assets.
The Option 3 is incorrect. There is no need to borrow money.
Option 4 is incorrect as we need to hedge the positons to redude funds volatility

.