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transactions with Merrill believed that they offered "very
attractive", "extremely favorable" terms. According to
calculations performed by petitioner's expert Tanya Beder
(Beder),16 the transactions effectively provided both banks with
funding at a cost 39 basis points lower than that available in
the direct interbank market. The 39 basis points in savings
represents each bank's net present value gain from the structured
transaction expressed in relation to the amount of the financing
involved. Beder's valuation analysis is useful for identifying
how the banks expected to gain overall while losing money on both
the basis and hedge swaps.
Valuation of the Positions of
BOT and BFCE as of 11/27/89
( $ millions = mm )
BOT BFCE
LIBOR Notes
Price rec'd from ACM $24.58 mm $9.83 mm
Mid-market value (24.05)mm (9.61)mm
Citicorp Notes
Price paid to ACM (124.58)mm (49.83)mm
PV of expected sale proceeds
rec'd by banks 125.39 mm 50.15 mm
Hedge Swap
Liability leg (24.88)mm (9.77)mm
Asset leg 24.08 mm 9.62 mm
Basis Swap
Asset leg 18.77 mm 7.43 mm
Liability leg (18.22)mm (7.29)mm
Merrill's cancellation option (0.89)mm (0.29)mm
16 Beder is affiliated with the New York consulting firm of
Capital Market Risk Advisors, and serves on the faculty of the
Yale School of Management.
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