To explain some liquidity dynamics in derivatives trading, we will provide market insides with a tiny amount of € cash trying to avoid a liquidation in a margin call position.
The initial account balance was 400€ when two perfect hedges were torn up leaving two unhedged delta positions.
At this point, please note that this is not and should not be an investment advice. The products shown should be used for hedging purposes. In the underlying scenario we are hired to avoid a liquidation of 2 delta long positions: VIX Long and € short.The market data and watch list is given plus the current account balance. A margin call was received and closing markets saved the positions from being liquidated.
At the end of this experiment our goal will be to end up with more than 800€. At the beginning of our experiment the portfolio is in a shortfall of 54,42€.
Initial position
Let’s say 400€ is 400,000,000€ in a pension fund of some FDP superstars to have some more fun in the scenario. Of course some SPD and Greens invested a small amount of about 120 million, too. Scholz by himself is not in. He wants us to win the 800€ to declare safe and sound markets. It is always allowed to close positions and let’s say an account withdrawal is saving your money with a CDU Schwarzkasse (come on, did you really think you would have been left out ). For an even more funky story let’s assume 30% of the portfolio is owned by Linke, Greens, FDP each. 10% is with the rest including AFD. CDU owns zero, but receives the 800€ to be withdrawn on Friday next week hopefully paying 400€ back to the fund keeping 400€ in their own pocket.We name this pension fund managed on a broker account. Maybe „FDP Nachhaltigkeitsfonds ESG 7.“ 7 since 7 parties CDU, SPD, Grüne, FDP, Linke, AfD set up this pension or hedge fund.
Please note, that the story about the German parties is fictive. The FDP Nachhaltigkeitsfonds ESG 7 with AUM 400,000,000€ in a margin call situation. And again, the story is fiction, the data and money is real. 1 € on an CFD Account represents 1 million in this storytelling approach.Day 1 Scenario
You are hired as a firesale trader to liquidate a 400,000,000€ pension fund of some FDP superstars. Of course, some SPD and Greens invested a small amount of about 120 million, too. Scholz by himself is not in. He wants us to win 800€ from my broker account to declare safe and sound markets. It is always allowed to close positions and let’s say an account withdrawal is saving your money with a CDU Schwarzkasse. For an even more funky story let’s assume 30% of the portfolio is owned by Linke, Greens, FDP each. 10% is with the rest including AFD. CDU owns zero, but receives the 800€ to be withdrawn on Friday, hopefully paying 400€ back to the fund keeping 400€ in their own pocket.
The solution for day 1:
We do not liquidate to do Bitcoin, because market shows high Margin requirements of 50%. We do just nothing, because you feel comfortable in a shortfall position. Other members basically pay my margin requirement for us. We just do not react on any margin call. We leave the liquidation decision to broker or CCP. Just checking overnight rates. Bitcoin slippage is 100%. We cannot really switch to any other position, because it would immediately mean a loss over a threshold we see for the valuation right now for FDP Nachhaltigkeitsfonds ESG 7.
The strategy to be applied is HODL!
Meanwhile losses of the fund are at 44.5 million €.
Day 2 Scenario
You are hired as a firesale trader to liquidate a 400,000,000€ pension fund of some FDP superstars. Of course, some SPD and Greens invested a small amount of about 120 million, too. Scholz by himself is not in. He wants us to win 800€ from my broker account to declare safe and sound markets. It is always allowed to close positions and let’s say an account withdrawal is saving your money with a CDU Schwarzkasse.
The solution for day 2:
We do just nothing, because you feel comfortable in a shortfall position. Other members basically pay our margin requirement for us. We just do not react on any margin call. We leave the liquidation decision to broker or CCP. Just checking overnight rates.
The strategy to be applied is HOLD!
Day 3 Scenario
You are hired as a firesale trader to liquidate a 400,000,000€ pension fund of some FDP superstars. Of course, some SPD and Greens invested a small amount of about 120 million, too. Scholz by himself is not in. He wants us to win 800€ for Warburg Bank from my broker account to declare safe and sound markets. It is always allowed to close positions and let’s say an account withdrawal is saving your money with a CDU Schwarzkasse. CDU owns zero, but receives the 800€ to be withdrawn on Friday, hopefully paying 400€ back to the fund keeping 400€ in their own pocket.
The solution for day 3:
We did not expect the example kicked-in that good. q.e.d. Intraday the 400 million threshold was reached, and an immediate liquidation would be possible.
The experts will tell you the position is already hedged in a stressed market. Dollar long VIX long is a solid strategy to end the CCP firedrill. A liquidation after 3 days is for listed business just not in line with regulatory demands of a 2-day liquidation period. For OTC it is even worse.
Closing remark
Our plan was to provide the show for five days, since OTC is less liquid and now the thing worked out for two days.
Of course, only idiots show their positions, like I showed my private broker account. But this is exactly what CCPs are forced to do by the regulators and the liquidation periods set.
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