Risk Governance Amaranth Advisors G
Risk Governance
- Group C
Amaranth Advisors
Q1. How significant were Amaranth´s positions in relation to the market? What were they hedging?
Hunter is expected to have held up to 100,000 contracts in a single month maturity while NYMEX in total had an average open interest of 71,869 for each year with total average open interest for a single month across different years were at the maximum 138,859 . This implies that Hunter held positions as big as the market and could have possibly traded via ICE and or OTC markets in addition to NYMEX. As per scenario 1, March-April spread trade had a $0.9 loss for each contract and this is very small for the company to lose $2.5-2.8 bn in 15 days, since such massive positions required to lose that much were not possible. Same for scenario 2, where the spread loss is $1.5, given a size proportional to open interest of 389,226. However as per scenario 3, the spread loss is $3.5 with contract size on winter contracts of 484,364 giving an overall loss of $1.45bn in line with the breakdown provided. However since it is impossible for any one trader to hold the whole market, it is highly likely that Amaranth held positions which were combinations of the above three.
Amaranth were taking spread bets. The advantage of spread bets is taking directional bets with hedging of underlying’s volatility in market. Profits depend only on the term structure of the future curve since the underlying for both the contracts are same. Amaranth was betting winter supplies would be lower and hence prices would be higher compared to that of the summer prices. However if the spread widens in short period, as in the case of Amaranth, the risk would be higher. If the short contract increases in price, the long contract is priced cheaper and hence can be increased in size if the shock is only short lived. If not, the losses would get much worse.
Q2. Liquidity constrains play any role? Please, explain.
Liquidity constraint is considered to be major
- Group C
Amaranth Advisors
Q1. How significant were Amaranth´s positions in relation to the market? What were they hedging?
Hunter is expected to have held up to 100,000 contracts in a single month maturity while NYMEX in total had an average open interest of 71,869 for each year with total average open interest for a single month across different years were at the maximum 138,859 . This implies that Hunter held positions as big as the market and could have possibly traded via ICE and or OTC markets in addition to NYMEX. As per scenario 1, March-April spread trade had a $0.9 loss for each contract and this is very small for the company to lose $2.5-2.8 bn in 15 days, since such massive positions required to lose that much were not possible. Same for scenario 2, where the spread loss is $1.5, given a size proportional to open interest of 389,226. However as per scenario 3, the spread loss is $3.5 with contract size on winter contracts of 484,364 giving an overall loss of $1.45bn in line with the breakdown provided. However since it is impossible for any one trader to hold the whole market, it is highly likely that Amaranth held positions which were combinations of the above three.
Amaranth were taking spread bets. The advantage of spread bets is taking directional bets with hedging of underlying’s volatility in market. Profits depend only on the term structure of the future curve since the underlying for both the contracts are same. Amaranth was betting winter supplies would be lower and hence prices would be higher compared to that of the summer prices. However if the spread widens in short period, as in the case of Amaranth, the risk would be higher. If the short contract increases in price, the long contract is priced cheaper and hence can be increased in size if the shock is only short lived. If not, the losses would get much worse.
Q2. Liquidity constrains play any role? Please, explain.
Liquidity constraint is considered to be major