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Flow of Benefits in 12/17/91 Structured Transaction
Diagram 3
Purchase Contingent LIBOR Notes at the Bid
ACM < BFCE
Benefit to Bank = $$
AMerrrill Capital puts the bank (BFCE) into the Hedge Swap
Position of a dealer Benefit to
ABank benefits by executing transaction at a dealer's Merrill = $
Price (Benefit shown as $$)
AThrough Hedge Swap, most of the benefit of dealer ?
Pricing is transferred back to Merrill (shown as $)
ABank is left with above-market asset, but has taken Merrill
Incremental credit risk Capital
Valuation of Sparekassen's
Position on 12/22/89
( $ millions = mm )
LIBOR Notes
Price paid to Southampton (9.41)mm
Mid-market value 9.63 mm
Hedge Swap
Asset leg 9.58 mm
Liability leg (9.63)mm
Merrill's cancellation option (0.17)mm
Net Present Value 7,208
Implied Return Over LIBOR 10.41%
1 The approximate calculation is: $7,208 gain divided by
$9,406,180 invested, spread over 0.189 year duration of payments.
The calculation assumes that Merrill Capital will cancel the swap
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