Presented By-Ayush Siddhartha & Ashish Mittal

“Business leaders were shaken by the collapse, which wiped out huge amounts of the market value of their companies. And they seemed to have been caught by surprise. But many leaders were confident the panic would pass.” …..October 20, 1987- New York Times

What is an Index Arbitrage?

• An investment strategy that attempts to profit from the differences between spot price and futures prices of the same stock index.

• Done by simultaneously buying (or selling) a stock index future while selling (or buying) the stocks in that index.

• Program trading.

What Went Wrong on October 19, 1987 ?

• The crash began in Hong Kong, spread to western Europe and then finally penetrated United States.

• Investors tried to reach their brokers but couldn’t due to the large inflow of phone calls. Millions were lost instantly.

• The National Association of Securities Dealers Automated Quotations

(NASDAQ) also recorded its all-time record one day loss of 11.35%.

• The day was stated as “Black Monday – October 1987”.

MARKET EFFECTS…

• By the end of October, stock markets in Hong Kong had fallen 45.5%, Australia 41.8%, Spain 31%, the United Kingdom 26.45%, the United States 22.68%, and Canada 22.5%.

• The Dow Jones Industrial Average (DJIA) lost about $500 billion and dropped by 508 points to 1738.74 (22.61%).

• The S&P 500 lost 58 points (30%).

• New Zealand's market was hit especially hard, falling about 60% from its

1987 peak, and taking several years to recover.

OpportunitiesThe Downfall

MAJOR CAUSES…• Very bullish investor sentiments.

• Program trading took the major blame.

• Failure of stock markets and derivatives to operate in sync.

• Inefficient trading mechanisms. Couldn’t deal with such large flow of orders.

• Large U.S. deficit on October 14, which led Treasury Secretary suggest a fall in the dollar on exchange markets.

• Bonds replaced stocks as an attractive investment.

• There were many company takeovers and mergers.

As a Result…

• The day after the crash, markets around the world were put on restricted - or limited - trading status.

• The world economy slowed down.

• The U.S. Fed cut down the interest rates.

• System of circuit breakers were introduced to automatically halt the prices if dropping rapidly.

• Companies bought back their own shares which were under-valued after the meltdown.

• The recovery was aided by an unexpectedly strong performance by the Nikkei Index in Japan, which helped boost markets around the world.

Could it happen again?

• It took almost two to three years for the market to recover.

• With the implementation of circuits, the probability of occurrence of a similar event is low.

• However, the market is will always carry a certain degree of risk.

THANK YOU….