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effort to determine the potential profitability of an investment
in the LIBOR notes at issue. Relying on a market-based forecast
for 3-month LIBOR as of February 23, 1990 and June 20, 1990,
Smith opined that the LIBOR notes had the potential to provide
returns up to $10,826,000 over their 5-year terms. Relying on
the "symmetric" theory of interest rate behavior--the theory that
a 525 basis point increase in interest rates was as equally
probable as the actual 525 basis point decrease in interest rates
that occurred during the period in question--Smith opined that
the LIBOR notes had the potential to provide returns of up to
$40,487,000. Relying on the "equal probability" theory of
interest rate behavior--the theory that the likelihood of
interest rates falling by one-half is equal to that of interest
rates doubling over the same period--Smith opined that the LIBOR
notes had the potential to provide returns of up to $80,683,000
over their 5-year terms.
Respondent retained Richard W. Leftwich (Leftwich),
Professor of Accounting and Finance at the University of Chicago
Graduate School of Business, to serve as an expert witness in
these cases. Leftwich believed that Smith's market-based forecast
for 3-month LIBOR was too high based on prevailing market rates
and forecasts. Leftwich further opined that, in assessing the
market's forecast of future interest rates, Smith improperly
ignored the impact of the so-called liquidity and risk premium
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