-65-
rate spread between the bill and the bond between 1964 and 1987
because it was significantly less than the actual spread at the
valuation date, the average spread for 1987, and the average
spread for 1983 through 1987. After correcting the spread used in
Dr. Cline's analysis, Ms. Czaplinski used Dr. Cline's formula to
arrive at a 25-percent discount solely attributable to liquidity
in the U.S. Treasury market on the valuation date.37
Dr. Froot also insisted that Dr. Cline's 10-percent discount
was too low. Froot concluded that a total 54.5-percent discount
was more appropriate for the following reasons: (1) The "swap
equity" was akin to restricted stock, which trades at 26- to 40-
percent discounts; (2) a significant discount is applicable
because the official and parallel exchange rates could be expected
to merge over a period of time, so that petitioner would not have
the benefit of a favorable cruzado-to-dollar exchange rate at the
end of the 12-year waiting period;38 and (3) a discount rate
37 In response to the criticism of both Dr. Froot and Ms.
Czaplinski, Dr. Cline testified that even though the 10-year bond
is highly liquid, the buyer faces the same waiting period before
maturity as the seller, and his discount represents an inherent
penalty for the waiting period.
38 At the time of the transaction, the official exchange
rate was 23.616 cruzados to one U.S. dollar, while the parallel
rate was 32.250 cruzados to one U.S. dollar.
Dr. Froot opined that if a convergence of the official and
parallel Brazilian exchange rates occurred, petitioner would pay
a 100 million cruzado "penalty" upon entering the debt-equity
(continued...)
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