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on the LIBOR Notes would offset approximately $906,000 ($5.31
million x .1707) of its share of the loss. After distribution of
the BFCE Notes, a 200 basis point increase in interest rates
would have generated a $3.79 million offsetting gain on the
remaining LIBOR Notes, of which Southampton would have been
entitled to only $478,000, in proportion to its 12.6 percent
post-distribution partnership interest. When Colgate would have
reviewed the results of Merrill's analysis and planned with
Merrill the distribution and sale of the BFCE Notes, it would
have understood that the discounted present value of the
transaction costs that it would bear in connection with the
acquisition and sale of the LIBOR Notes would be in the vicinity
of $2-3 million. The potential hedging benefits would properly
be discounted for uncertainty. Let us assume, for example, that
there was a weighted average probability of 50 percent that
interest rates would rise by an average of 200 basis points
during the foreseeable future. A 50-percent probability is still
clearly an overstatement, given the declining interest rate
environment predicted in the implied forward rates that Beder
estimated, in the market swap rates that Merrill used to price
the LIBOR Notes, and in the Colgate treasury department's own
forecasts. Nevertheless, even under this extreme assumption, the
maximum hedging benefit that could be expected during the
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