1988 - 2nd Quarter (2)
1988 - 2nd Quarter (2)
April 16, 1988.
"Gomunnim. Could you reconsider once more?"
Today too, David spat out the same words.
Since there are no investors, this employee bastard is harassing me.
It's probably because his own incentive is tied to it, but even so, that persuasion comes from goodwill, and since anyone can see that the fault lies with me, it's a bit difficult to bitch and moan.
"David."
"Yes!"
"Shut up."
"...Nweh..."
David, crumpled by a single word, began the daily report with a tearful face.
"The total number of contracts liquidated so far is 1,821, and the profit is $11,790,975."
"How many are left?"
"9,040 contracts."
I roughly cleared about 600 contracts per day.
The remaining period is about 25 trading days.
Even if I give myself some leeway in terms of time...
It's a pretty decent speed.
"The closing price yesterday was 88.4, right?"
"That's correct."
"What's our average liquidation price?"
"87.9."
I nodded my head.
Overall, the progress is satisfactory.
Both the speed and the price.
"It seems we can sell similarly today as well."
"Hoo-. Clearly a huge profit is coming in, but why am I even more worried?"
I waved my hand dismissively.
"Then go and get ready."
"Got it."
After sending David away, I turned on the terminal.
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[Breaking News]
April 16, 1988
<Bloomberg>
[Bridgestone, Firestone White Knight Joins the Battle!]
Japanese tire manufacturer Bridgestone has declared itself a white knight for Firestone.
The tender offer price is $80 per share.
.
.
───────────
"Oh."
The breaking news about Firestone's acquisition popping up on the terminal's main screen.
It's good news.
Pirelli had attempted a hostile takeover at $58, right?
It seems negotiations went sour and they got angry.
They're slamming down $80 right from the start.
When Japanese guys go on a money-spending rampage, they really do it thoroughly, as expected.
Seeing the breaking news pop up right before market opening, it seems they are quite angry.
"...Huh?"
Ara, who was also looking at the terminal beside me, was startled.
"Call Bruce and tell him to liquidate at $80."
"Me?"
"Yeah. You can handle that level now, right?"
"Yes-! Please leave it to me!"
BE Holdings, which doesn't operate traders separately, has to rely entirely on the skills of Goldman Sachs's traders.
If I can't squeeze out the profit to the extreme anyway, I should use it for Ara's training purposes.
Since she's seen it from beside me, she should be capable of dribbling through the middle.
'Then, how much profit should I expect?'
Around $12 million?
I'll need to calculate precisely to know, but probably between $12 and $13 million.
'It's enormous.'
$500,000 invested, and at least $12 million.
I feel it every time, but the profit rate seems a bit insane.
Whenever I sell, the baseline is 20x.
I thought Nikkei would yield the best profit, but...
Tirurururung-!
As the opening bell rang, my mind snapped back to focus.
Now is the time to concentrate on EXE's trading.
The liquidation of BE's call options has already been entrusted to Ara, so the profit will come in on its own.
"88'05! 06, 07, 10! Opening bullish market!"
"What should we do?"
"Let's wait first. It will definitely drop below 88."
"Got it. Everyone, stay!"
"Yes!"
"It's been a while since we have some leeway at opening time."
The employees seemed quite relaxed.
They were veterans from the start, but it seems they are confident they won't fail since profit is being realized while liquidating.
Of course, if they learn about the 30-year bond purchase, they'll foam at the mouth like David.
"Notify me if it goes below 00."
"Got it."
Tadatadak-!
During the brief free time, I typed a command into the terminal to display the current bond information.
'9.04%...'
The current yield on the 30-year bond is 9.04%.
Since on-the-run is the benchmark, off-the-run should be roughly around 9.1%.
"Should I consider it around 9.4%...?"
I muttered while looking at the chart in the Status Window.
The target interest rate shown on the chart is 9.3%.
But that is definitely based on on-the-run.
Since I plan to purchase off-the-run, I should add a slight additional interest rate.
"I've finished the order. Were you looking at the 30-year bond?"
"Yeah."
Currently, only Ara and David know about the bond purchase plan.
"Boss, I have something I'm curious about."
"What?"
"You said you'd use repo to leverage and buy bonds."
"Right?"
"What does that mean exactly?"
And the only person who accurately understands that is David.
Ara is still learning.
"Repo..."
RP.
Repurchase agreement bond.
"I'll need to explain this a bit more in detail."
The beginning and end of modern finance.
This is something I shouldn't explain casually with metaphors as usual.
Because it's an excessively important product for that.
"I'll explain it at the office later. Right now, futures liquidation is the priority."
"Yes."
Ara nodded her head.
"It's reached 88'00!"
At David's shout, I turned my gaze back to the terminal.
"...Let's wait another 3 minutes. I want to see the execution intensity a bit."
"3 minutes, stay!"
3 PM.
The market ended.
CBOT is based on Chicago time, so it closes at 2 PM there.
"You can leave for today."
"Yes! It's leaving time! You bastards!"
"Yes!"
"I wish every day was like today."
"Can I swipe the corporate card?"
"It's given to swipe, isn't it!"
"Kiyahoo! Alcohol! Alcohol! Alcohol after so long!"
No overtime today.
Because the liquidation quantity exceeded the target.
Since this era has no electronic commerce, the futures market doesn't operate 24 hours.
CBOT introduced a night market last year for Asian institutional investors like Japan, but since it's an open outcry where you have to trade with hand signals on the pit one by one, it's inevitable that activating the night market is difficult.
"Should we go too?"
"Yes."
Ara and I headed to BE's office.
"How did Firestone go?"
"I thought there was no need to finish liquidation today, so I asked them to focus on the $80 target price rather than speed and sell in batches. It's not much, but I wanted to collect the option premium too."
"Oh-."
There's value in diligently teaching beside her.
Even if I had given the order, I would have done it in a similar way.
There weren't any stocks worth investing that money in immediately.
Incidentally, while liquidating futures, a notification popped up with a red dot in front of my eyes.
One additional roulette spin.
That wasn't urgent, so I planned to spin it around evening time.
"Right, I promised to explain repo."
"Yes."
I sat straddling the sofa after steam cleaning and opened my mouth.
That's the sofa where we did the 3P.
Anyway.
"Where should I start explaining? First, RP is the biggest system that allows the leverage method to operate."
"Leverage?"
"Have you never thought it was strange? How much money do banks have that they can hand out funds several times, dozens of times the amount?"
"...I haven't thought about it, but hearing it now, it is."
If it's a commercial bank, an answer might emerge.
Because there are customer deposits and savings.
But investment banks?
Among IB, Shearson Lehman Hutton, the largest IB, called Lehman Brothers in the distant future, has capital of only around $4 billion.
That's capital woefully insufficient to handle hundreds of billions of dollars in customer notional.
"Before that, you know IB can't accept deposits?"
"Yes."
Since it's a time when the Glass-Steagall Act is still alive, commercial banks and investment banks are perfectly separated in their domains.
Meaning, investment banks legally cannot accept deposits.
That's why Merrill Lynch created the CMA product and operates it in a modified deposit format, isn't it?
"The biggest methods for IB to raise funds are repo and MMF."
Ara had already taken out a notebook and pen from her pocket and was fully prepared to take notes.
I opened my mouth while drinking the coffee she brought.
"I'll explain the operating principle of repo first."
"Yes."
"Assume there's a $100 bond here. If you borrow $100 using that as collateral, that's a collateral loan."
Anyone can understand up to that point.
"I'll talk about the distinction between repo and collateral loan a bit later. For now, think of the collateral loan itself as repo."
"Got it."
"You borrowed $100 using a $100 bond as collateral. And if you buy another $100 bond with the borrowed $100?"
"???? Then just uh... $200 bond with $100 debt?"
"That's right. The $100 bond deposited as collateral and the newly purchased $100 bond. And the money to repay is $100. You understood up to here?"
"Yes."
"If you borrow another $100 using the newly purchased bond as collateral?"
"...Ah!"
"This time, there would be $200 bond as collateral and $200 debt."
"And if you buy another $100 bond with the newly borrowed $100..."
"That's leverage."
Of course, in reality, it doesn't operate just theoretically like that.
"But there's no reason to lend $100 using a $100 bond as collateral. Loans have something called LTV. Repo similarly has a haircut, so in reality, different amounts come in depending on the bond type."
For things like short-term U.S. Treasuries, a zero haircut is possible, but for long-term bonds over 10 years, they usually put around 1~3%.
Meaning, the money you can borrow using a $100 long-term U.S. Treasury as collateral is $97.
"So that's how leverage multiples come about!"
"Oh! You understand quickly, as expected?"
The first time you borrow, it's $97, the second time it's $94.09 after applying a 3% haircut to $97.
Like this, the amount you can borrow decreases at each stage.
"Calculating like that, with a 3% haircut, you can apply up to 33.3x leverage."
"That's right."
Ara, as if she had realized something, began busily writing in her notebook.
"But... Isn't that just a loan?"
She tilted her head and asked.
"In the past, it was like that."
The reason modern finance could grow rapidly was because repo replaced loans.