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Big Game Case Solution & Answer

Big Game  Case Solution

Libyan Investment Authority (LIA)

The case involved an unfortunate relationship between Goldman Sachs and the Sovereign Wealth Fund (LIBYA), the LIA and the elephant transaction (derivatives), which ultimately ruined $ 1.2 billion. The LIA celebrated in late 2007 on the advice of Goldman Sachs(Peress, 2018).

Zarti, Executive Vice President of OFLIA, was impressed with his work and invited the Goldman Sachs team, representing $ 4 billion (revenue), 30,000 employees and $ 10 (profit), to discuss “investing in an aperitif” and quickly decided to that, according to the advice of its external consultant, Barony, they are investing and investing $ 350 million in two Goldman Sachs mutual funds.

Yousef, Sales Manager at Goldman Sachs, began to meet with Zarti and his employees on a regular basis and taught them various financial concepts (sell / buy options) for investment purposes. Yusuf introduced them to fine wines, iPod, financial books, etc., and made a deep impression on them. He later organized an internship for Zarti’s brother. This made a deep impression on Zart and prompted him to invest in Goldman Sachs instead of derivatives.

  1. LIA attributes the transaction to the following reasons:
  • Libya’s thriving economy must improve and promote growth that cannot be achieved without international relations.
  • Most of the income from oil sales is invested in high-quality, low-interest securities. Otherwise, if you invest elsewhere, you will have the opportunity to invest in global, high-yield funds. This is one of the main reasons why the Libyan authorities and international financial institutional relations are investing in their extra income and strengthening global partnerships in general, making them a more popular economy globally than the world. don’t imagine.
  • This type of trade develops the whole country through globalization, and globalization is achieved by shutting down the economy in the first 40 odd years.
  1. The LIA signed a contract with Goldman Sachs instead of buying derivatives itself, as the LIA authorities do not make sense of the funding fund, especially the global funding fund, and the use of derivatives, options and other similar investment channels. This is the main reason Goldman Sachs spends a lot of money, the goal is for LIA executives and employees to understand the most basic features of doing business with LIA.
  2. The types of risks related with such derivative agreements are as follows:
  • Commodity risk which discusses the uncertainty of future market value and the amount of income caused by fluctuations in commodity prices.
  • Stock market risk which occurs due to the stock price fluctuations for several reasons, they are therefore very volatile as compared to the debt market risk.
  • Interest rate risk which is considered the potential risk of losing an investment due to a variation in interest rates.
  • Credit risk which is the opportunity of loss caused by non-payment of a loan or fulfillment of the borrower’s contractual obligations.

Goldman Sachs

  1. Goldman Sachs entered the business for two reasons:

For the company, attracting such an important customer is first and foremost an issue, which is no small reward. He also entered a difficult country. The administration of a country like Libya can give sovereignty to financial institutions and investment banks over the country’s banking and investment activities. If the same failure is going to be a great opportunity and a serious impact, but if Goldman Sachs didn’t give them all the opportunities, they couldn’t give up on such an opportunity and eventually it became every deal.

The secondary and main unidentified reason for closing the transaction was to hedge the institutions ’positions in Citigroup, and this was done because the investment received from the LIA was used to fully hedge. their position.

  1. The risks associated with hedging Goldman Sachs are as follows:

An expected hedging transaction is the institution’s main source of risk because it assumes future positions taken before future buy and sell transactions.

Hedging risk may increase or decrease depending on the financial conditions in the global market. As global financial conditions deteriorated, the situation worsened further, eventually allowing for huge investment losses.

Hedging risk is not to carefully analyze Goldman’s position in equities or derivatives, and as global signals continue to show a sharp decline in the market, Goldman Sachs ’position in equities or derivatives. derived products increased.

  1. After trading, the risks for Goldman Sachs are as follows:

Due to the nature of the clients involved in the transaction, the risk of lower return on investment and inappropriate investment is much higher in this case.

Stock market risk is generally very high, but after the outbreak of the global financial crisis, investments increased dramatically, causing bloodshed, a market crash, and eventually a decline in the value of Citigroup shares. This is only post-trade risk, but ultimately Citigroup risk. Goldman Sachs and its client, LIA, have entered into 9 high-value elephant deals that have become the worst nightmare.

Because terrorism involves the nature of customers, national security is under serious threat. If the real investment of the active client does not reach the expected level or falls to an unimaginable level, it can also contribute to the war.

Citigroup Trade in Exhibit 5

In the chart listed below, the call option is the right to purchase an asset at a pre-determined price no later than a pre-determined date in the future and not a bond.

This chart shows the return on the option as the underlying price change. Above the $ 100 strike price, the option returns $ 1 for each USD appreciation of the underlying asset. If the share falls below the strike price at maturity, the option has no value. Therefore, call options have unlimited growth potential but limited disadvantage.

Put options are not obligations, but the right of put options to sell assets at a pre-determined price, at the latest at a pre-determined time in the future. The return graph of a sell option appears to be a mirror image of a call option (along the Y axis). Under the $ 100 strike price, the underlying asset of the put option wins $ 1 for each devaluation of the dollar. If the stock expires above the strike price, the put option has no value………………….

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