The author recounts a sequence of currency and bond trades in which he increases and reduces contract counts while trying to catch up. He describes the pattern as a trap and ends with a preference for steadier contract counts.
Do not turn a memoir preference into a universal formula
The broader lesson is to identify why size changed. Constant contracts do not necessarily mean constant economic risk, because instruments and volatility differ. Our exercise examines the rationale and consequences instead of prescribing the author’s historical contract policy.
Worked example
Two identical fictional signals receive different exposure only because the first followed a loss. A subsequent difference in results now reflects both the signals and the emotional sizing change.
Case connection
Risk depends on exposure relative to available capital. Position size needs a rationale beyond recovering an earlier loss.
LTCM: a funding emergency
Source-grounded facts
Fourteen firms supplied $3.6 billion to prevent LTCM’s collapse. The Federal Reserve facilitated the arrangement without lending its own money.
Context
LTCM sought gains from price differences between related securities. Small spreads were supported by extensive borrowing; at the end of 1997 its debt was about thirty times its capital.
Outcome
The recapitalisation allowed an orderly reduction of positions. The Federal Reserve coordinated the arrangement without supplying its own funds; the original owners and investors still suffered substantial losses.
- In August 1998, Russia devalued its currency and stopped debt payments, pushing investors towards safer, more liquid assets.
- Spreads that LTCM expected to narrow widened instead. The fund lost 44% in August and sought fresh capital.
- Concern about simultaneous liquidation brought creditors together. Fourteen firms supplied roughly $3.6 billion in September.
Case analysis
Exposure has meaning relative to the capital supporting it. A constant notional position becomes more demanding when capital falls. Review a size change by its rationale: new evidence, a changed constraint, or a desire to recover a loss. These explanations are not interchangeable, and none should remain hidden behind a general statement of confidence.
Try it
Audit three imaginary size changes. Label each as evidence-based, constraint-based or recovery-driven.