Business, 29.05.2021 01:30 jholland03

Suppose bond market liquidity condition has substantially improved after introducing high frequency traders in recent years. The trading costs of Bond B is significantly reduced. Suppose initially LTCM could make 0.4 billion dollars from using a bond trading strategy with a total equity investment of 1 billion dollars, i. e., 40% return on equity. Now after the reduction of transaction costs, they can only make 10% return on equity from trading (i. e., 0.1 billion dollars). In order to bring equity return back to 40%, what they should do? a. Put 0.5 billion dollars in trading Bond A and 0.5 bilion dollars in trading Bond B
b. Borrow another 3 billion dollars from brokers and use this additional money to trade on the same trading strategy.
c. Borrow another 2 billion dollars from brokers and use this additional money to trade on the same trading strategy
d. Borrow another 1 illion dollars from brokers and use this additional money to trade on the same trading strategy

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Suppose bond market liquidity condition has substantially improved after introducing high frequency...