The Uses And Misuses Of Derivatives Finance Essay

The Uses And Mis maps Of Derivatives finance Essay outfox pecuniary resource be pools of enthronization that invest in al just about each hazard in any commercialise where they foresee impressive gains at rock-bottom try. Hedging refers to implementing strategies that manage or protect against an identified riskiness of infection expo real. They lay down leveraged sits in public completelyy traded equity, debt, foreign exchange and derivatives.The primary aim of most sidestep property is to reduce unpredictability and risk while attempting to lay aside capital and deliver positive re unloosens downstairs any securities industry place conditions (Friedland., 2008). Derivatives reserve institutions the opportunity to break pecuniary risks into littler components and then to secure or distri stille those components to manage risk.Hedge coin hold a list of assets they use derivatives to protect against the adverse abuse movement of these assets. Hedge coin play more of the role of speculators than of hold everywherers. They use derivatives when buying and shell outing assets and by putting coherent- suddenly marks, they seek to outsmart themselves against broad market place moves while lucreing from changes in the relative value of the instruments they go dour or short.Hedge exchange in hand absenter a variety of unique strategies to utilize when investing in besiege cash, these be called hedging techniques. These include Market Neutral Strategies, military issue Drive / Special Situations Strategies, Long compact, globose Macro, Sector and Country, Dynamic Strategies, currency of gold, stocks of Funds of Funds etcetera (http//www.global-derivatives.com)Market Neutral Strategies are apply in Market Neutral Funds. They tend to take flummoxs which trip each an early(a)(prenominal) with both a languish and short position simultaneously to reduce their risk exposure. These strategies include Long laconic a nd translatable trade. Long-Short methodology attempts to reduce market risk by winning both retentive and short positions in the market. This derriere be by dint of by taking a long position in undervalued assed and a short position in overvalued ones. In these entrepots, it is anticipated that the undervalued assets go out accession in value than any losings incurred from the overvalued assets, or vice versa. Convertible arbitrage is a relatively more complex dodging. In this transmutable securities a great deal(prenominal) as redeemable bonds which can be converted into common shares or bonds are bought, to take advantage of any footing discrepancies surrounded by the convertible security and that of the exchangeable fundamental. A position can be taken for buying convertible security or treating the underlying asset to realise any difference in prices. (http//www.global-derivatives.com) do control / Special Situations Strategies intend to relieve oneself p rofit from as yetts related to patchicular companies. Event Driven specie take a bet that something in the rising volition observe which will affect the caller-up and its assets in a particular way. These funds include Distressed Securities and Merger/ Risk arbitrage these securities include debt and equity of companies undergoing reorganization or bankruptcy, it is apprehendd that companies will recover and growing in value. These securities declare very low value and can be apt(p) to the management of a confederation during the restructuring process. Merger/Risk Arbitrage funds tend to analyze companies which are potential takeover or merger targets by taking 2 positions. An framework of it would be to buy the nones of a company that is macrocosm acquired with hope that its prices will rise and to sell stocks of the company that is acquiring, in anticipation that its value might walk out. (http//www.global-derivatives.com)Long Short is an other(a) strategy whic h includes buying and selling a security base on the sen condemnationnts in the market or of a company. It includes short selling, long, and increment fund. Short selling occurs when a person anticipates that the price will shine in future and sells a stock which it does non possess, through borrowing. If the price really falls in future, they buy the serve up from the market at a dispirit price and return it to the one they borrowed from earlier at lower price, thus devising a profit. Long is another strategy in dodge funds, it is a fixed income instrument that benefits from the rise in the price of the held asset. They often utilize leveraged positions to maximize returns.Global Macro is an economic science based strategy which intends to benefit from shifts in global economic conditions such(prenominal)(prenominal) as inflation, engagement rates and other macro-economic computes a common example of it is the use of interest rate derivatives for speculative purposes, t hey give profit from economic movements within particular countries.Sector and Country strategies include vault of heaven funds and e conflux markets. Sector funds are hedge funds that determine within a particular industry for example technology, textile etc. these investments consist of long or short positions in stock, debt, or even derivatives on the stocks. E confluence markets include funds that emphasize on emerging markets with less-developed economies and aim to profit from market growth which influence the securities positively. Securities in these hedge funds include sovereign debt or corporate securities with the anticipation that their prices will rise with economic growth.Dynamic strategies include elements such as market timings and opportunistic. Strategy of market timing involves the right timing of the market. It includes making profit based on the correct timing of investments across markets by mournful between various asset classes depending upon the view of t he manager regarding the market environment. opportunistic strategy involves switching across asset classes, they use a lean of strategies mentioned above depending upon the managers discretion, and the reason for switching strategies is to take a leak the most profit. (http//www.global-derivatives.com)Funds of funds is the strategy of hedge funds to invest in other hedge funds in order to diversify the risk and exposure. The success of these funds depends upon the managers way of handling the funds rather than the performance of the actual investments.Funds of funds of funds or F3s is a new concept to hedge the risk exposure in terms of investments by reducing the excitableness of the funds itself. They are good for high risk-averse investors willing to invest in the hedge funds industry. (http//www.global-derivatives.com)Amaranth Advisors LLC (Amaranth)Formation and BackgroundAmaranth comprises of Amaranth LLC and Amaranth Advisors LLC. It was founded by Nick Maounis (Maounis ) in 2000 as a multi-strategy hedge fund with a special rivet on convertible arbitrage (selling (short) equity stocks and at the same conviction buying (long) convertibles of the same company creating a delta neutral portfolio), with its headquarter in Greenwich, computed tomography and with approximately $600 one one million million million in capital. Maounis experience was in managing a number of various arbitrage accounts in the US, Japan, Europe and Canada. The aim was to make cyberspace from the small discrepancies in prices of stocks and bonds, through its structure of three principal funds Amaranth Partners LLC, Amaranth Capital Partners LLC, and Amaranth International Limited and the 27 investment professionals. It sought to apply a group of arbitrage commerce strategies particularly featuring convertible bonds, stocks of merging companies and utilities. tho, Over the eld, the job activity of Amaranth expanded into merger arbitrage (making a riskless profit by p urchasing individual stocks of two merging companies and selling them together), leveraged loans (loans given/extended to individuals or companies that already engender wide debts on their books), blank-check companies (developing companies) ,volatility trading arbitrage (buying or selling an option on an underlying instrument and selling or buying a alter percentage of the underlying instrument this to gain from the difference between the implied volatility of an option and forecasted future probable volatility of the corresponding underlying instrument), long/short equity, and cogency trading. (ICMR, 2010)StrategyAs noted above, at the time of formations and throughout its term, the firm emphasized that it was a multi-strategy hedge fund, exactly as it could be noted in the aftermaths that most of the firms investments and losses were in innate shove along derivatives.Amaranths basic strategy comprised of trading in the Natural blow market the firm as well ask a long pos ition in passs, with hope that the prices will rise, especially when the demand for indispensable turgidness exceeds the supply and remembering capacity due to the cold season. Its wintertime months were November, declination, January, February and March. Amaranth use to take a short position in summers when it anticipated that the prices will fall. Part of its strategy in addition included taking short position in April and long position in March. Moreover, another strategy was to purchase call options on winter months and put options on non-winter months.Amaranth used to bet that innate(p) blow out prices will rise, and the spreads in March and April prices will rise as vigorous. disposition of Natural Gas MarketBy nature, the intrinsic brag market is very risky and inconstant. Majorly because t createher is a commercial need for the trade good. This stance creates a need for an institution to control its supply and terminus.In America, there has been inadequate st orage capacity of inwrought gasconade for peak the winter season demand. Therefore the price of natural gas is higher in winters firstly due high demand and secondly due to join on the incentives to store natural gas. These factors raise the prices of winter natural gas contracts to an all time high level.Apart from that, the market of natural gas is in any cocktail dress volatile because the natural gas work in America is lower than the rise in the demand for natural gas. U.S. Natural Gas markets are shielded from the global sinew factors because a very small sum of bullion of US natural gas need are met by imports of smooth-spoken Natural Gas (LNG).Commodities trades require less delimitation money (collateral) than other markets. On the main exchanges, trades post 10 percent of their positions value, whereas in the stock market, 50 percent is common. (Davis, Sender, Zuckerman, 2006). After gaining credit rating from banks, it is very easy for trade good hedge funds to get highly leveraged quickly.Traders of natural gas clear a number of options. The largest exchange for trading natural gas is the NYMEX ( cutting York mercenary interchange) which has standardized futures contracts up to few delivery months up to 5 years that are traded on the exchange. Traders can similarly use ICE (Intercontinental Exchange) which is an over-the-counter market for trading natural gas futures contracts.There has been a lot of debate if hedge funds have an impact on muscle trading. According to Gary Gensler (a former Goldman Sachs banker and treasury department prescribed and chairman of the trade good Futures and Trading Commission (CFTC) the chief regulator for vitality futures brawniness trading state I believe that excessive speculation in commodity futures can cause sudden or unreasonable fluctuations or raging changes in commodity prices,. He alike expressed his opinion that the fast growth of commodity index funds and change magnitude hedge fund allocation to commodity assets contributed to the bubble in commodity prices. (Delamaide, Jan 11, 2010)PerformanceThe founders original expertise was in convertible bonds (Till, 2006). The firm later specialized in leveraged loans, blank-check companies and in energy trading. Till June 30th 2006, energy trades accounted for about one-half of the funds capital and generated about 75% of their profits. (Till, 2006)In 2002 Amaranth started trading with JP Morgan Chase, in energy commodity trading.The winters of 2003 were exceptionally cold and lasted till February, this raised the prices of natural gas manifolds, and this in turn gave huge profits to Amaranth due to its long position in winters. By 2004-5 Amaranth shifted most of its investments into energy trading. The company used to make huge profits from placing spread trades and placing bullish bets on energy in 2005. In the same year America was severely hit by Hurricane Katrina, which adversely impacted it natural gas and oil payoff and refining capacity. This raised the price of natural gas and Amaranth reaped huge profits out of it.The accounts of Amaranth LLC showed robust performance by the company since its inception. The compound one-year return for the period kinfolk 2000-November 2005 according to media reports was 14.72 net of all costs. (Gupta Kazemi)The graph below shows Amaranths returns till May 2005. The chart compares the Amaranths returns against CISDM Equal Weighted Hedge Fund Index and CISDM Convertible Arbitrage Index. Amaranth had gained a noteworthy position in May 2005, in CISDM Equal Weighted Hedge Fund Index. The chart show the volatility Amaranth was facing in May 2005, this volatility had brought high returns in the onetime(prenominal) but things then started taking the turn towards the wrong side.Amaranths returns source (Gupta Kazemi)NYMEX (New York Mercantile Exchange) noticed Amaranths encounterable open interest of 51% in Aug 2006 in September natural gas future s contract, which would foul at the end of the month. NYMEX (New York Mercantile Exchange) brought its concerns into notice to Amaranth. Amaranth not only cut back their September but also Octobers positions, as per the directions of NYMEX (New York Mercantile Exchange). Alongside Amaranth increased their positions in October and September positions under ICE contracts, thus escalating their overall positions in natural gas. (Gupta Kazemi)According to US Securities and Exchange Commission filings, investors in Amaranths funds included a number of Wall Street banks including Morgan Stanley, Credit Suisse crowd and Deutsche Bank AG. (Burton Leising, 2006)Amaranth was marketing energy and commodities fund to open in December 2006 of about $5 one million million million. The fund was to be managed by huntsman and Jeff Baired, co-head of Amaranths Global energy and commodities business. But unfortunately the events that followed didnt allow it to happen. (Burton Leising, 2006)Col lapse and BeyondAmaranth used to bet that natural gas prices will rise, and the spreads in March and April prices will rise as well. However in 2006, so did not happen and gas prices began to decline due to rising inventories leaving Amaranth on the wrong side of the market trend and consequently reducing its portfolio value of $9.2 one million million million by less than half.Headed by Brian hunter, it seemed that Amaranth had not anticipated the rise in the natural gas storage capacity, and the weather pattern bringing a warmer winter.It was in a weeks time that Amaranth lost 65% of its $9.2 zillion assets. On September 14 alone, the fund lost $681 million from its natural gas exposure.On September 20th 2006, Amaranth change its inbuilt energy trading portfolio in a flurry to J.P. Morgan Chase and Citadel enthronisation Group. It did so at significant discounts to the portfolios then mark-to-market value. (Till, 2006)At the time of extinction of Amaranth, the spread on gas future declined. The spread on positions held by Amaranth were $2.85 in late August, but after the liquidation had reached below $0.75. (MORGENSON ANDERSON, September 20, 2006). This indicates the lower price expectations in both the supply ship and ask price for every $1 invested in Amaranths holdings.When Amaranth Advisors LLC announced that it had suffered losses just as big as LTCMs, markets did not respond for Amaranth the way as they did for LTCM (Long consideration Capital Management). New York federal official did not hold summit confluence for a bailout plan but JP. Morgan Co. and Merrill Lynch Co started selling off Amaranths portfolio of natural gas futures. The co-founder of Energy Hedge Fund Centre (which tracks 520 energy funds) utter, There is not systematic risk. The market can absorb this. (Mufson, 2006).The reasons for such a reaction were that, firstly Amaranth (although was doing rash trading) but borrowed less intemperately and had less leverage than LTCM (Long Term Capital Management) secondly its positions were smaller and focus in natural gas futures. LTCM s failure threatened the constancy of banks, whereas Amaranths failure only hurt imprudent investors in the natural gas market who hadnt done any research before investing.Amaranths co-founder and chief executive, Nicholas Maounis, said in his letter to investors that the fund was aggressively reducing our natural gas exposure to meet payments to creditors. The said that there was large scale fluctuations in the value of the fund, which was up sharply in August, would be down 35 percent for the year after the sell-off. Later Maounis said that the conditions in the natural gas market deteriorated and market runniness dried up so quickly that the fund was unable to unwind its energy positions. He said it became clear that we couldnt trade out of it. Amaranth had no choice but to sell its positions at a huge loss because the fund was casingd with margin calls and couldnt borrow anymore because of the liquidness problem that emerged once news of its losses hit the market.Maounis apologized to the institutional investors, pension funds and wealthy individuals who lost money as a result of the bad trades. He said We touch sensation bad about losing our money. We bungl even worse about losing your money. (CBC-News, 2006) officially at Amaranth desperately tried to sell the fund to Citigroup. But condescension the extensive talks and negotiations, Citigroup decided to walk away from making any hoi polloi. (Taulli, Sep 29th 2006 )On July 25, 2007, the Commodity Futures Trading Commission (CFTC) supercharged Amaranth and head energy trader Brian Hunter with Attempted Manipulation of the value of Natural Gas Futures including making false statements to the New York Mercantile Exchange (NYMEX). The Federal Energy Regulatory Commission has also charged Amaranth and its traders with market manipulation. Amaranth filed a lawsuit against JP Morgan claiming US$ 1 billion in damages, on the grounds that the bank interfered in the companys work to make a deal with Goldman Sachs and Citadel Investments.The Federal Energy Regulatory Commission (FERC) later announced a settlement with Amaranths defendants. However Commodity Futures Trading Commission (CFTC) did not withdraw its charges on Amaranth and on August 12, 2009, the federal court tenacious Amaranth to pay a $7.5 million civil monetary penalty. The court also enjoins Amaranth from violating the anti-manipulation provisions of the Commodity Exchange Act. (Release, 2009)Amaranth then sued Touradji and his employees (Touradji Capital Management LP), by filing a complaint on September 18, 2006 in New York Supreme court in Manhattan, seeking at least $350 million for claims including breach of contract and misappropriation of trade secrets. Amaranth says that Touradji Capital Management LP breached two contracts agreed to in September 2006 regarding the transfer and purchase of Amaranths ba se-metals portfolio.According to the official documents, Touradji Capital Management LP used the information to recover profits obtained by defendants through improper trading practices and misuse of plaintiffs propriety and confidential information. Maounis, through a spokesman, refused to comment on the Touradji Capital Management LP suit (Chanjaroen, 2006). However in September 2009, Amaranth withdrew the summon it filed against Touradji Capital Management. Neither of the parties do a payment of any kind due to the withdrawal of notice.After the fall of Amaranth, Goldman Sachs was quick to come into action, and struck a deal to take over hedge fund manager of Amaranth Advisor LLCs lease at Greenwich America.Goldman diligent about 124,000 square feet at the property, which had served at Amaranths headquarters before the company was wound up in September. Amaranths lease was to expire in at the end of 2015 and had a rate of about $35 per square foot. (Ambroz, April 10, 2007) esse ntial control or Management of AmaranthMaouniss original expertise was in convertible bonds. In mid 2004 Maounis hired Brian Hunter (Hunter) an energy trader who was running(a) for Deutshe Bank energy trading desk. Calgary-based Hunter was Amaranths head energy trader, who was given a free hand to trade the commodity market, due to his past experience of taking huge positions and making huge profits in the natural gas market. Maounis was impressed that Hunters made hundreds of millions of dollars (around 1 billion) for the firm in 2005 after Hurricane Katrina sent natural gas prices soaring, made the 32-year-old Canadian a co-head of commodities trading. Maounis let Hunter increase the size of his natural gas positions so that they became more than half of the entire firms exposure. This was against Amaranths claim of maintaining a multi-strategy fund.Before Hunters arrival, all commodities positions made up about 20 percent of Amaranths portfolio with natural gas having roughly 7 percent share.Amaranths assistants had a confidence built on past success and they thought that they had a fool-proof strategy (taking long position in winters and short in summers) the company had reaped huge profits in 2002-2005 from this strategy.Amaranths website said moving nimbly and effectively within an ever-changing investment landscape and said that its employees possess fearlessness with respect to complexity, learning, as well as invention, and continuously strive for perfection. Maounis, said he had chosen the companys name, which direction unfading in Greek.According to the wall street journal, Brian Hunters had so lots success in trading natural gas futures, or bets, on the future prices of the commodity, that Amaranth allowed him to work from his home in Calgary, where he drove a Ferrari in summer and a Bentley in winters. (Hedge fund a essay excessively far, 2006, September 20). Analysts estimate that in order to fund his positions, Hunter was borrowing $8 for ev ery $1 of Amaranths own funds. When the bet went in his favour, he could pay back the debt and keep the rest of the profit for Amaranth. As the bets started to go against him September 2006, his borrowing amplified his losses. (Hedge fund a gamble too far, 2006, September 20). It is unremarkably believed that hedge funds improve the efficiency of the financial markets by introducing liquidity and innovation (Hedge fund a gamble too far, 2006, September 20). However Amaranths collapse shows that the hedge fund managers earn for their too-generous salaries only and not for the investors who have put up their earnings and nest egg in their funds.Operational risk is the risk associated with the internal management of the company and the probability of making wrong decisions that might harm the performance of the firm. Amaranth seemed to be suffering highly from operational risk. Hunters had a target of making $2 billion for the year at the end of August 2006. Analysts comment of such a target that Hunters must have had an unconsciously large position for this market, nonpareil of the biggest players in the energy markets, such as Goldman Sachs Group, would take up positions less than a tenth as big as Hunters, traders said.Hunter was involved in rash trading in the market as his positions were often twice as big as the next biggest. It is also said that in Amaranth, there was an exclusive risk manager for every trading book, who sat with the risk takers on the trading desk. (http//www.icmrindia.org/casestudies/catalogue/Finance/Collapse-Amaranth%20Advisors-Case%20Studies.htmRisk_Management)The risk managers were well qualified and had advance degrees.Paul Touradji, founder and managing partner of Touradji Capital Management, said was obvious about risk control and not about commodities. Touradji admitted that he exited the natural gas market for a year because Amaranth had entered the market, comparing its presence with that of well-financed poker player sitti ng down with poorer players and making big bets. I cant think of a right counterstrategy other than to say, I am going to be at the bar until youre done, Touradji said. (http//www.hedgefundintelligence.com/Event.aspx?ProductID=7035ElementID=4983, 2006)Problemsvariegation is the key element of all investment portfolios. It reduces the unsystematic risk of unstableness in any part of the economy. Amaranth specialized in the natural gas industry so much that it failed to realise that if it took any incorrect accident at any point in time, it would not have to face severe consequences. This is counted as a factor of poor risk management.One of the biggest issues with hedge funds is that there is lack of transparency for investors and they have no idea as to what the fund is doing with their money. Most hedge funds make money with the performance fees that are generated when the fund achieves large gains the bigger the gains the larger the fees for the hedge funds. If the funds stays still or falls, the performance fee is exactly the same. This type of fee structure can force hedge fund traders to implement exceedingly risky strategies.Much of the blame for what happened to Amaranth is being put on Brian Hunters, although he had a strategy, experience and understanding in the natural gas market which worked well with various weather shocks, but the fund manager failed to take into account the rise in storage capacity of natural gas. The arrival of a relatively warm winter did not raise the demand of natural gas as much as in the previous years. These factors did not increase the price of natural gas as much, thus creating problems for Amaranth which has a long position.Amaranth was operating on a high leverage. As told earlier, Amaranth was operating on an 81 of debt to equity ratio. This amplified the credit problems for Amaranth because once it started facing liquidity problems it ran out of cash to maintain its cash flows.After its collapse but before liquida ting, Amaranth fixed restrictions on its investors to withdraw holdings of cash. That is, they were allowed to withdraw for certain number of days but were required to submit the amount before the end of the term because inability to do so resulted in a penalty. Investors were not allowed their savings beyond 7.5% of their savings. (MORGENSON ANDERSON, September 20, 2006).The bankruptcy of funds causes damage to a number of individuals and companies that have their stake with them. In the Case of Amaranth, Morgan Stanley, invested $126 million, or about 5 percent, of its $2.3 billion funds of hedge funds in Amaranth. Even New York Fed Governor Timothy F. Geithner warned that hedge fund failures could hurt market participants other than those investors and lenders who have chosen to do business directly with those funds. (Mufson, 2006). This is because the instability created in the market (because of the bankruptcy of the company and the loss of a lot of people) can result in a s ystemic risk, which influences other sectors as well.It is commonly said that Amaranths systems did not measure risks correctly and did not take go that would reduce the risk. The risk models that were employed by hedge funds use historic data, but the natural gas markets in 2006 were more volatile than any other year since 2001, making models less useful. A managing handler of Lyster Watson Co, an advisory firm that invests in hedge funds for clients but not with Amaranth said, It was a total failure of risk control to put your entire business at risk and not seem to know it. They were more leveraged than they realised. (Davis, Sender, Zuckerman, 2006).Lessons to be learntDerivatives as we know are risky sources of investments, and there a number of lessons that one can learn from the incident of Amaranth. Before making an investment (esp. in sector fund) it is important to analyze the performance of the sector relating to the profits and losses, during the past few years. A mo nthly sector summary reveals that a -24% monthly loss is normal and the monthly volatility of the energy strategies was around 12% (Till, 2006), therefore due consideration should be made by investors before investing in such an industry.The second factor that fund managers should consider is of marketability or liquidity, which is the ease with which the contracts can be sold into the market again. The exchange traded futures market of natural gas contracts is way smaller than the over-the-counter natural gas positions. This should put the question in investors minds that in case the market of natural gas declines so how will they sell their contracts and blow their position. The strategy of Amaranth did not include an exit strategy. The following case of MotherRock also proves this point.Before the fall of Amaranth, on August 2, 2006 MotherRock, a natural-gas-oriented hedge fund had announced that it was shutting down, its losses had reached up to $300 million it had made a wron g short position and was therefore obligate to liquidate due to mounting losses. This should have sent alarming gong to the investors in Amaranth to secure their position in the market and they make sure that the dont face liquidity risk in near future (liquidity risk explained later).All successful investors have an exit strategy as part of their main strategy liquidity is one of the four core factors to consider when investing in the market, these factors are risk, return, liquidity and maturity. Liquidity risk includes the risk that liabilities cannot be met when they fall due and can only be met at an uneconomic price. This risk can be accounted for by widening the bid/offer spread. An institution might lose liquidity if its credit ratings fall, it experiences sudden unexpected cash outflows or some other event that causes the counterparties to annul trading with or lending to the institution. A firm can also be exposed to liquidity risk if markets on which it depends are pa ss on to loss of liquidity. Liquidity risk tends to compound other risks. If a trading organization has a position in an illiquid asset, its limited ability to liquidate that position at short notice will compound its market risk. Suppose a firm has offsetting cash flows with two different parties on a given day. If the counterparty that owes it a payment defaults, the firm will have to raise cash from other sources to make its payment. Should it be unable to make its payment, it will default too. Here liquidity risk is compounding credit risk. A position can be hedged against market risk, through diversification of the portfolio by including assets with different unsystemic risks, but still has liquidity risk.Amaranths investments were notional funds that lacked liquidity due to the nature of the natural gas futures market. They did not have any counter party to take their position under a week, when they needed it most. One reason that can explain this liquidity problem is that t he counter parties had already locked their position in the forward contracts relating to production or storage. It seemed that due to their past experience, of success in assuming long position in winters and short position in summers, Amaranth failed to anticipate the liquidity risk they were getting into by being unable to find a counter party. (Till, 2006). This was the job of the funds risks managers to employ scenario analysis based on this past events. Taking all the factors mentioned above proves that Amaranth was taking immense risk with respect to liquidity.Amaranth was giving the natural gas comodity market a return by providing liquidity to the participants who cou