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Question 2 In early 2007, the publicly-owned railway in the Portugese city of Porto, Metro do Porto (MDP), entered into an exotic interest rate swap
Question 2 In early 2007, the publicly-owned railway in the Portugese city of Porto, Metro do Porto (MDP), entered into an exotic interest rate swap with the Spanish bank, Banco Santander (BST) that came to be referred to as a 'snowball' swap. This swap, along with similar swaps promoted by BST, would later become the subject of litigation when MdP and other counterparties defaulted on their obligations during 2013. Refer to page 155 of the Approved Judgement for precise details on the terms of MdP's swap, and in particular, how the 'spread' on the floating rate leg was determined. (b) In his judgement of March 2016, Mr Justice Blair described this type of swap as 'advantageous' to MdP but 'very risky'. What features of the swap with BST made it both 'advantageous' and 'very risky' to MdP? (6 marks)
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