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Welcome to our support website for the business case “Big Game: Goldman Sachs' Elephant Hunt in Libya”.

Read an inspection copy of the case.


Summary

The case focuses on the ill-fated relationship between the LIA, Libya’s new sovereign wealth fund, and Goldman Sachs, notably the ultimately disastrous $1.2 billion derivatives (elephant) trades that the LIA entered into in early 2008 on the advice of Goldman Sachs.

The epilogue centres on the LIA’s lawsuit in which they accused Goldman Sachs of having exploited the lack of finance acumen of the LIA staff to lure them into making trades they did not understand to be so risky. In October 2016, the London court ruled against the LIA.
 

Teaching objectives

Any subset of the following issues can be covered:

  1. Option properties:
  • Basic derivative instruments: forwards, puts, and calls.
  • Terminology and payoff diagrams.
  • Key concepts in derivatives: leverage; counterparty risk; synthetic vs. direct position.
  • Trade rationales for the LIA and Goldman Sachs’: hedging, speculation or mistake?
  1. Option valuation:
  • The impact of maturity, strike price, early exercise and dividends on a derivative’s value.
  • The Put-Call Parity relationship. Does it hold for listed options?
  • Arbitrage-based valuation bounds.
  • Volatility and the dividend yield calibration.
  • Binomial option pricing.
  • Black-Scholes option pricing formula.
  • Monte Carlo simulations.
  • The trade’s value and its evolution
  • Path-dependency in derivatives.
  • Pricing exotic derivatives: Accounting for the lookback strike feature
  • Hedging exotic derivatives: Impact of a stock price drop (delta) and volatility increase (vega).
     

Alternative Session Plans

The case can be taught in a variety of formats depending on time, participants, etc. as displayed in the table below. TN1, TN2 refer to the Teaching Notes for Session 1 and Session 2.
 

Topics/Format Material (in Teaching Notes)
Options Basics
(90mn if students come prepared, half day if they work in session)
TN1: Situation; Trade mechanics, properties and rationale; Value impact of strike, maturity, dividends; Conclusion; TN2: What happened?
Option Basics w/ Value Bounds
(90mn if students come prepared, half day if they work in session)
TN1: As above + Value bounds w/o (and possibly w/) dividends; Conclusion; TN2: What Happened?
Introduction to Binomial Trees
(90mn if students come prepared, half day if they work in session)
TN1: Situation; Trade mechanics; TN2: Binomial trees w/o (and possibly w/) dividends; Conclusion; What happened?
Introduction to Black-Scholes
(90mn if students come prepared, half day if they work in session)
TN1: Situation; Trade mechanics; TN2: Black-Scholes w/o (and possibly w/) dividends; Conclusion; What happened?
Introduction to Binomial Trees and Black-Scholes
(90mn if students come prepared, half day if they work in session)
TN1: Situation; Trade mechanics; TN2: Binomial trees + Black-Scholes w/o (and possibly w/) dividends; Conclusion; What happened?
Advanced Binomial Trees
(90mn if students come prepared, half day if they work in session)
TN1: Situation; Trade mechanics; TN2: Binomial trees w/o and w/ dividends; Model Calibration; Floating Lookback Strike; Conclusion; What happened?
Advanced Option Pricing
(90mn if students come prepared, half day if they work in session)
TN1: Situation; Trade mechanics; TN2: Binomial trees + Black-Scholes w/o and w/ dividends; Model calibration; Floating Lookback Strike; Monte Carlo Simulations; Conclusion; What happened?
Options for Beginners: 1 Day
(90mn if students come prepared, half day if they work in session)
Session 1, TN1: Situation; Trade mechanics, properties and rationale; Value impact of strike, maturity, dividends; Conclusion; Session 2, TN2: Binomial trees + Black-Scholes w/o dividends; Conclusion; What happened?
Introduction to Exotic (path-dependent) Options
(Two 90mn sessions if students come prepared, one day if they work in session)
TN1: Situation; Trade mechanics; TN2: Floating Lookback Strike; Model Calibration; Hedging; Monte Carlo Simulations; Conclusion; What happened?

 

How to buy the case

  • Hard and soft copies of the case and teaching note (which contains the login and password to access the private area of this site) can be purchased via our distributors’ websites. To choose a distributor please visit the INSEAD Case Distributors page.
  • The case can also be purchased directly from INSEAD.
  • If you are not a registered instructor, follow the instructions on our distributors’ websites to identify yourself as such.

 

 

 

 


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