Introduction
In December 1994, Orange County shocked the markets by announced that their investment portfolio had suffered an enormous loss of 1.6 billion dollars （Jorion 1995). Becau without the relevant supervid and few investment reports, Robert Citron， the County Treasurer, bet himlf on the derivatives markets. His complex and high risk portfolio leads to the huge loss， which caud the scares in the market and led to the bankruptcy of the county at the end. This was also the largest local government failure in investment pool (Jorion 2001）.
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This paper will attempt to show how this crisis happened with the risk management techniques in the derivatives markets。 Excessive return always accompanies by high risks. Simplex invested in the interest nsitive derivatives contracts， and then over leverage magnified the effect of interest rate fluctuation, which finally leads to the enormous loss. The paper analyzes this crisis in first regarding the strategy of Citron's investment and showing the major risks in the Part II, before giving some reasons why it is difficult to hedge
the risks in Part III and showing some learning and improvement points from the Orange County ca in Part IV.
I. Strategy of the investment
自由英文Becau of the successful investment during the history， Citron built his own fabulous performance and authority in the area。 He was entrusted with as large as 7.5 billion dollars funds, which comes from 200 different public bodies (Jorion 1995)。 周克崧
Expected lower or stable interest rate, Citron invested the money in the interest nsitive derivatives contracts， looking forward to increa returns for his funds （Spiro， Byrnes & Schiller 1994). There are two key compositions of his portfolio: short position in money market and long position in the bond market。 崔文凯
In the money market, he largely ud the Rever Repurcha Agreements。 This kind of contract allowed him to ll his owned curities and pledge to buy them back later at an agreed price。 Citron pledged the purchad curities as collateral to get some chea
ply borrowing。 And then， he re—put this money in a new curities investment to continue the further cycles. Theoretically speaking， this kind of cycles can continue to repeat forever, which is also the way increa leverage。 While getting two or three repurchas contracts， “one on top of the other"， the investor also increas the amount of same times to the original amount. According to the annual report to the Board of Supervisors in August 1991, Citron wrote down： “We have perfected the rever repo procedure to a new level." (Jorion 1995)
In the bond market， he purchad various Fixed-Income Securities including government bonds， municipal bonds and so on. Citron invested heavily in structured notes, valued around 8 billion dollars， which incread the leverage even further (Jorion 1995）。 The problems of structured notes are clear explained by Jorion （1995）， which normally overpriced to get profit for brokers。 Furthermore, the most important fact here is this kind of investment was usually considered a quite safe ast， becau of the lower credit risk of government or municipal bonds. However， in fact， there is another significant risk. Even with “a fixed face value”， the market value can change thr
ough time。 The value is cloly linked to the fluctuant interest rates, moving inverly with the interest rate.
眩晕吃什么药好It is clear Citron’s portfolio “esntially implemented a bet on falling， or at least stable interest rate” (Jorion 1995）。 Actually, the strategy was quite out performance in the early 1990s， during the time of low interest rates (Jorion 2001)。 Enormous profits were gotten from the positives relative value between the yields in the money market and bonds market。 Unfortunately， the US interest rate began to concutive increa from 3% to 3。25％ in 1994, though the Federal Rerve Bank’s adjustment （Jorion 1995）. Thus， the value of many curities in the Orange County’s portfolio decread. 中国有几个主席
Even wor， being the collateral， if the values of curities decrea, extra margin should be paid to the dealers， which is an important regular for repurcha agreement. With the continued fall of the curities value， large sums of margin payment were required. They “was forced to pay more on its borrowings than it was earning on its investments" （Spiro, Byrnes ＆ Schiller 1994）。 Fail to meet the additional payment，
dealers have the rights to force to ll the collateral, the curities. According to Jorion （1995）, at the end of 1994， the cash rerves of the investment fell sharply from 1。4 billion dollars to about 350 million dollars. As they cannot meet the margins, a dealer “acted expeditiously to liquidate the collateral". This first one became the signal led to the bankruptcy in December (Jorion 1995).
II. Major risks
1. Funding liquidity risk
励志小短语Esntially, the repurcha agreement is a contract bad on the value of the collateral. The ller may not have the ability to repurcha the collateral as the contract signed at beginning， which could also be en as credit risk for the dealer。 Thus， for hedge the risk， the dealer will call the margin payments to balance the value of collateral with the market value。 Thus, margin payments are quite significant during the process。 The potential risks of without meeting the margin may lead unexpected lo to the ller。 In the Orange County ca, Citron believed in “holding to maturity" and ignored the market v
alue decrea of asts. As hindsight， the interest rates really fast went down to about 2.5% in 1995 （Jorion 2001）。 However， the point here is that enough money must be available to meet the margin payments during that difficult time.
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