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In the Beginning

Although LTCM wasn't formed until 1993, its roots can be traced to the early 1980s and John Meriwether. In the early 1980s, bond trading was still dominated by men who traded on their instincts. Michael Lewis writes about these intimidating and often reckless traders in his book Liars Poker.[1] Successful bond traders seemed to be able to tell which way the wind was going to blow and then make big bets to profit on those instincts. Meriwether was a bright young star at Salomon's bond trading unit who knew the markets well. However, instead of taking risky trading positions derived from instincts, Meriwether was a fan of the calculated gamble.

Two decades earlier, the “rocket scientists” had invaded the academic finance field. These newcomers created mathematical equations to describe the value of securities. These financial economists provided structure to chaos. Particularly important to this story is the theory on the price behavior of derivatives developed by Fisher Black, Myron Scholes, and Robert Merton. The theory is generally known as the Black–Scholes option pricing theory.


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