Big Game: Goldman Sachs' Elephant Hunt in Libya
The case focuses on the ill-fated relationship between the LIA, Libya's new sovereign wealth fund, and Goldman Sachs, and the ultimately disastrous $1.2 billion derivatives (elephant) trades the LIA entered into in early 2008 on Goldman's advice. The analysis deals with basic derivative instruments, terminology and concepts (e.g., leverage, counterparty risk) as well as valuation issues both intuitive (e.g., put-call parity, arbitrage-based valuation bounds) and technical (binomial trees, Black-Scholes formula, Monte Carlo simulations, volatility and dividend yield calibration). It also discusses the pricing and hedging of exotic derivatives. Epilogue: In a subsequent lawsuit brought by the LIA, Goldman Sachs was accused of having exploited the lack of finance acumen of LIA staff to lure them into trades whose riskiness they did not understand. In October 2016, a London court ruled against the LIA. Please visit the dedicated case website "https://cases.insead.edu/big-game/" to access supplementary material.