- 69 -
on March 1, 1990, when the opportunity to do so first arises: At
the inception of the swap, the prospect of a decline in BFCE's
credit sufficient to warrant retention of the option at the large
cost that this would impose was highly unlikely.
As in the structured transaction that Merrill designed for
the other two banks, Sparekassen could expect to lose money on
the swap; the source of its gain is the bid-side spread implied
in Merrill's pricing of the LIBOR Notes. The transaction pricing
resulted in the transfer from Southampton to the bank of more
than $200,000 in value, most of which would ultimately enure to
the benefit of Merrill Capital. See diagram 2 supra p. 67.
By agreements among BFCE, Sparekassen and Merrill Capital,
the BFCE LIBOR Notes and the two hedge swaps related to them were
terminated during 1990.
Merrill arranged another hedge swap for BFCE in conjunction
with the bank's purchase of the BOT LIBOR Notes from ACM for
$10,961,581 on December 17, 1991. The structure and function of
this swap were for the most part identical with those of the
hedge swap between Merrill Capital and Sparekassen. BFCE agreed
to pay Merrill Capital amounts equal to the flows it was entitled
to receive under the BOT Notes. Merrill Capital agreed to make
12 equal quarterly payments aggregating $10,961,581, together
with interest on the unpaid balance at LIBOR plus 35 basis
points. The interest rate was stepped up after the first year
unless Merrill elected to terminate the swap and acquire the
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