IMD-1-0246 © 2006
Cossin, Didier; Lu, Abraham Hongze
In May 2005; Ford and GM were downgraded and this created considerable turbulence in equity markets; debt; and credit. This company-specific event affected financial markets; particularly credit markets that had the largest sell-off since 2002. Surprisingly; despite the widening of credit spreads; news of investor buy-in helped equity markets rally.
May 2005 Ford And GM Downgrade Case Solution
The links among credit; debt; equity and derivatives markets were broken which led to huge losses for arbitrage players across different marketplaces. Speculators and investors alike were pulling plugs; liquidating unprofitable places and rushing out of the door in the same time. The short squeeze created pricing discrepancies that were abnormal in credit and derivatives markets. Phil Berg; a credit hedge fund manager; confronted the choice to profit from the pricing discrepancies; not in the peaceful interval before the occasion; but in the turmoil after the occasion. Learning objectives: This case introduces them to the interrelationship of financial markets and gives MBA students a summary of the progressive history of credit derivatives markets. The links among credit; debt; equity and derivatives markets are discussed in the context of a credit event which endangered the imperfections of the financial markets.
Subjects: Hedge fund; Credit; Derivatives; Capital structure arbitrage; Correlation
Settings: United Kingdom; Banking; May 2005
Related Case Solutions & Analyses:
Eagle Finance Corp. A
SKS Microfinance: The Sour Taste of Success
ExlService: Business Process Outsourcing in India
Longbow Capital Partners
Poseidon Carlsbad: Desalination and the San Diego County Water Authority
A Better Way of Managing Major Risks: Strategic Risk Management
Anheuser-Busch and Campbell Taggart, Spanish Version
Chrysler’s Warrants: September 1983
Jaguar plc–1989, Spanish Version
Philip Morris Companies and Kraft, Inc., Spanish Version
