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the foreign banks. The banks could have expected to retain only
about $300,000 of this value, because their basis and hedge swaps
with Merrill Capital were structured in such a way that the
present value of the swap payments they were entitled to receive
from Merrill Capital was less than the present value of the swap
payments they were obligated to pay to Merrill Capital. Thus,
the value of BFCE's right to quarterly payments of 3-month LIBOR
Notes over 5 years on a notional principal amount of $27.91
million was $9.62 million, while the value of its obligation to
pay $9,831,661 in equal quarterly installments over 5 years
together with interest on the unpaid balance at LIBOR minus
25 basis points was $9.77 million. As a result of the
discrepancy in the value of these two legs of the hedge swap,
Merrill Capital could have expected to realize a net gain, and
BFCE a net loss, of $150,000.
The hedge swap between Merrill Capital and ABN was
structured in a manner similar to the hedge swap between BFCE and
Merrill Capital. The ABN swap differed from the BFCE swap in
only two respects. First, the payment obligations on both sides
of the ABN swap were proportionately larger. In the BFCE swap,
the notional principal amount of the fixed notional leg was set
at an amount ($27.91 million) equal to 50/175, or 28.5 percent,
of the combined total notional principal amount of the BOT and
BFCE Notes ($97.76 million); in the ABN swap, it was set at an
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