Wait or Act Fast? Best Strategy to Recover an Investment
In 2012, a couple from Cyprus, Andreas and Elena Ioannou, faced the challenge of recovering their investment in the capital securities of Laiki Bank, the second largest bank in Cyprus. They had purchased the securities in 2009–2010, tempted by their high return. They believed the bank securities were safe investments. On May 22, the couple was shocked to receive a tender offer from Laiki Bank for voluntary exchange of their capital securities into either the Bank’s ordinary shares or a new type of capital securities. As it turned out, Laiki Bank was in serious financial trouble. How should they proceed? Should they wait or should they act fast? This critical incident provides an illustration of the irrational reluctance to exit investment at a loss, known as the disposition effect. Students are also challenged to formulate lessons learned by individual investors in the current volatile markets disrupted by the European debt crisis.
- Demonstrate knowledge and comprehension of different types of financial instruments available to individual investors
- Calculate the losses/returns for different scenarios and do break-even analysis (using Excel tools)
- Explain how the disposition effect and related theories apply to this situation
- Evaluate the situation and recommend the best course of action to recover the investment
- Formulate the lessons learned from this example