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for any losses. However, in private agreements between two companies, there may not be benchmarks for performing due diligence and risk analysis, making the transaction riskier than it’s exchange-traded counterpart.7. How is derivatives settlement different from securities settlementInstead of clearing and settling within 3 days, derivatives often remain outstanding for a much longer time - sometimes months and years. Unlike securities, where the security is delivered and simultaneously paid for in full, derivatives represent an obligation (futures or swap contract) or an option (options contract) to buy or sell a financial instrument or asset at a future date. As a result, the buyer and seller pose financial risks to an exchange for an extended period of time. Because of this large risk, exchanges require daily mark-to-market posting and adjustment of collateral based on the changing value of the derivatives contract. Derivatives therefore require substantially more complex risk management systems than are required for securities. The exchange also provides a performance guarantee and anonymity between counterparties. To protect itself from financial loss that will occur if an investment bank or other counterparty fails to deliver against their trading obligations, exchanges require all counterparties to deposit performance collateral.Chapter 8: International Banking1. What are the benefits of issuing and investing in Eurobonds?Eurobonds are debt instruments that are listed on an exchange in bearer form (i.e. owned by whoever is holding the security instead of in registered form with registered owners). They are issued and traded outside the country whose currency the Eurobond is denominated in and outside the regulations of a single country (for example, a U.S. corporation’s Eurobonds are not subject to SEC oversight). Benefits of issuing Eurobonds: they can be issued in many forms, including fixed-rate coupon bonds, convertible bonds, zero-coupon bonds, and floating rate
bonds. In addition, interest income from these bonds is exempt from withholding tax and bonds are generally not registered with any regulatory body. 2. Why are most corporate Eurobond issuers large, multinational corporations?Large, multinational corporations generally have high credit quality and the capacity to hire an international syndicate of banks to underwrite the Eurobond issuances, as well as the resources to access a wide distribution network of investors in a number of countries.3. A put option gives the holder the right, but not the obligation, to sell an underlying asset at an agreed-upon price. Discuss why the Japanese government's guarantee to Ripplewood as part of its buyout of Long Term Credit Bank is similar to granting Ripplewood a put option on the bank's assets.