Suppose that Dealer A owes Dealer B a swap contract with a market value of $5, whereas Dealer B owes Dealer A a swap contract with a market value of $8. Dealer B has other liabilities to other creditors worth $12, while Dealer B only holds $3 in cash, so Dealer B goes bankrupt. a. Dealer A and Dealer B trade OTC without netting contracts. In bankruptcy, the assets of Dealer B are shared equally among all creditors. Q: Suppose that Dealer A and Dealer B wrote derivative contracts that allow netting in bankruptcy (and thereby a reduction of replacement losses), whereas Dealer B’s contracts with other creditors do not involve derivatives. In bankruptcy, after netting the derivative contracts with Dealer A, the assets of Dealer B are shared equally among all creditors. i) After netting, compute the total liabilities of Dealer B. ii) In bankruptcy, how much does each creditor of Dealer B obtain per dollar of liability? iii) How much of its total liability of $8 does Dealer A recover?
Suppose that Dealer A owes Dealer B a swap contract with a market value of $5, whereas
Dealer B owes Dealer A a swap contract with a market value of $8. Dealer B has other liabilities
to other creditors worth $12, while Dealer B only holds $3 in cash, so Dealer B goes bankrupt.
a. Dealer A and Dealer B trade OTC without netting contracts. In bankruptcy, the assets of
Dealer B are shared equally among all creditors.
Q: Suppose that Dealer A and Dealer B wrote derivative contracts that allow netting in
bankruptcy (and thereby a reduction of replacement losses), whereas Dealer B’s contracts with
other creditors do not involve derivatives. In bankruptcy, after netting the derivative contracts
with Dealer A, the assets of Dealer B are shared equally among all creditors.
i) After netting, compute the total liabilities of Dealer B.
ii) In bankruptcy, how much does each creditor of Dealer B obtain per dollar of liability?
iii) How much of its total liability of $8 does Dealer A recover?
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