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An investor enters into a 5-year total return swap with Bank A, with the investor paying a fixed rate of 6% annually on a notional value of $100m to the bank and receiving the returns of the S&P500 index with an identical notional value. The swap is reset monthly, ie the payments are exchanged monthly. On Jan 1 of the fourth year, after settling the last month's payments, the bank enters bankruptcy. What is the legal claim that the hedge fund has against the bank in the bankruptcy court?
Suggested Answer: C
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According to ISDA standard definitions, the legal claim for OTC derivatives is the current replacement value of the contract. Therefore Choice 'c' is the correct answer. None of the other choices are correct.
13 comments · newest first
NG
Nguyet
11 months ago
Definitely not $100m, that's just the notional value.
VE
Verlene
11 months ago
I think it's $0 since they were up to date on payments.
SH
Sharmaine
12 months ago
Wait, how can they claim that if the payments were current?
SU
Sueann
12 months ago
Totally agree, it's all about the replacement value!
AR
Art
12 months ago
The investor has a claim for the replacement value of the swap.
AL
Alise
1 year ago
I’m a bit confused about the fixed payments. If they’re all settled, does that mean the hedge fund has no claim? I need to double-check that.
NO
Novella
1 year ago
I feel like we went over this in class. The hedge fund should be entitled to the replacement value of the swap, right?
JE
Jess
1 year ago
I’m not entirely sure, but I think if the payments are current, the claim could be $0. That sounds familiar from our practice questions.
ME
Mendy
1 year ago
I remember discussing how the legal claims in bankruptcy can depend on the net position of the swap. I think the hedge fund might claim the replacement value.
AD
Adelle
1 year ago
Hmm, I'm not sure. I'll need to review my notes on mobile testing approaches to decide which one is the best fit here.
DE
Denise
1 year ago
Hmm, I'm not totally sure about this one. I'm debating between Environment Planning and Policies Planning. I'll have to think it through carefully.
IL
Ilona
1 year ago
I think I read something about the structure of coverage affecting costs, but I'm not clear on how it connects to other characteristics.
FE
Felix
1 year ago
Hmm, I'm not sure I fully understand what this is asking. The wording is a bit unclear to me. I'll have to think it through step-by-step.