Your friend further asks you about the Credit Default Swaps (CDS) Market how the protection buyer can agree to pay premiums additionally to accept 30 percent payment of the bond contracts notional value from the protection seller if the recovery value (recoverable amount) in a credit event is 30% Homework 6 (related with the 6th Week, 28th Reading Material): Your friend asks you (1) how a rural internet and telecommunications company like Windstream, not directly involved in the CDS market, could be hurt by the credit default swap transactions of its creditor, Aurelius Capital Management, a hedge fund and (2) why credit default swap transactions could pose potential threat to the U.S. financial system a) What is subaggregation clause in sovereign debt restructuring? b) Why does uniform applicability requirement not guarantee the same economic effect for all series of the hypothetical country Evening bonds if restructured bonds for all bond series have 10 years of maturity with 1% interest rates? c) Which bond series are mostly and least affected by the restructuring looking at (1) interest rate and (2) maturity changes? d) How could subaggregation satisfy uniform applicability requirement in this case? Country Interest Rates Maturity of Interest Rates Maturity Morning On Bonds Bonds Restructured Restructured Bonds Bonds Series A 9 % 3 years 1% Series B 5 % 1% 6 years Series C 11 % 16 4 years 196 Series D 6 % of 10 years 10 years 10 years 10 years 8 years Your friend asks you (1) why debtor countries are staying away from using Covid-19 Debt Service Suspension Initiative (DSS) despite its potential financial benefit to them. (2) why is restructuring of international bonds issued by sub-sovereigns (such as provinces) and state-owned enterprises (SOE) harder than restructuring of sovereign bonds (Table 1), (3) why holdout behavior cannot be fully prevented under the single-limb voting mechanism in some countries (Table 2), (4) why is restructuring of Venezuelan debt highly complex? 2.0- 0- 0.4 0.4- 0.8 0.8. 1.2 1.2- 1.6 1.6- 2.0 Table 1: SOE and Sub-National International Bond Issuance (billions of dollars) Table 2: Minimum Bond Purchase for Holdouts In Low Income Countries (billion $) Number of Low Income Countries 20 2009 13 1 1 2 1 2014 2019 79 140 Answer your friend who claims that Japan as an advanced country does not need (1) inbound tourism revenue (2) Japanese regional economies are not affected by the change in inbound tourist numbers (Table 1) (3) Japan has always more travel service debits than credits in percentage GDP (Table 2) (4) Japanese visits abroad against foreign arrivals in Japan always result in deficits in service balance in Japan (Table 3) and (5) for these reasons Japanese inbound tourism has not been affected largely by the coronavirus pandemic. Table 1: 2017 Regional Distribution of Inbound Tourism Expenditure Table 2: Japanese Travel Service Credit Balance Table 3: Japanese Goods and Service Balance (Trillion Yens) Kanto 41% Debit Credit Goods Service Service Service/ Transport Travel Other Travel Credit to GDP Ratio (6) 2006 2010 2014 2018 -0.8 Kinki Hokkaido Others 30 % 7% 22% 0.60 0.48 0.40 0.40 02 0.24 0.4 0.85 2009 2012 2015 2018 5 .5 -0.5 1.2 -0.2 0.3 -0.2 -0.7 0.5 2.5 Your friend further asks you about the Credit Default Swaps (CDS) Market how the protection buyer can agree to pay premiums additionally to accept 30 percent payment of the bond contracts notional value from the protection seller if the recovery value (recoverable amount) in a credit event is 30% Homework 6 (related with the 6th Week, 28th Reading Material): Your friend asks you (1) how a rural internet and telecommunications company like Windstream, not directly involved in the CDS market, could be hurt by the credit default swap transactions of its creditor, Aurelius Capital Management, a hedge fund and (2) why credit default swap transactions could pose potential threat to the U.S. financial system a) What is subaggregation clause in sovereign debt restructuring? b) Why does uniform applicability requirement not guarantee the same economic effect for all series of the hypothetical country Evening bonds if restructured bonds for all bond series have 10 years of maturity with 1% interest rates? c) Which bond series are mostly and least affected by the restructuring looking at (1) interest rate and (2) maturity changes? d) How could subaggregation satisfy uniform applicability requirement in this case? Country Interest Rates Maturity of Interest Rates Maturity Morning On Bonds Bonds Restructured Restructured Bonds Bonds Series A 9 % 3 years 1% Series B 5 % 1% 6 years Series C 11 % 16 4 years 196 Series D 6 % of 10 years 10 years 10 years 10 years 8 years Your friend asks you (1) why debtor countries are staying away from using Covid-19 Debt Service Suspension Initiative (DSS) despite its potential financial benefit to them. (2) why is restructuring of international bonds issued by sub-sovereigns (such as provinces) and state-owned enterprises (SOE) harder than restructuring of sovereign bonds (Table 1), (3) why holdout behavior cannot be fully prevented under the single-limb voting mechanism in some countries (Table 2), (4) why is restructuring of Venezuelan debt highly complex? 2.0- 0- 0.4 0.4- 0.8 0.8. 1.2 1.2- 1.6 1.6- 2.0 Table 1: SOE and Sub-National International Bond Issuance (billions of dollars) Table 2: Minimum Bond Purchase for Holdouts In Low Income Countries (billion $) Number of Low Income Countries 20 2009 13 1 1 2 1 2014 2019 79 140 Answer your friend who claims that Japan as an advanced country does not need (1) inbound tourism revenue (2) Japanese regional economies are not affected by the change in inbound tourist numbers (Table 1) (3) Japan has always more travel service debits than credits in percentage GDP (Table 2) (4) Japanese visits abroad against foreign arrivals in Japan always result in deficits in service balance in Japan (Table 3) and (5) for these reasons Japanese inbound tourism has not been affected largely by the coronavirus pandemic. Table 1: 2017 Regional Distribution of Inbound Tourism Expenditure Table 2: Japanese Travel Service Credit Balance Table 3: Japanese Goods and Service Balance (Trillion Yens) Kanto 41% Debit Credit Goods Service Service Service/ Transport Travel Other Travel Credit to GDP Ratio (6) 2006 2010 2014 2018 -0.8 Kinki Hokkaido Others 30 % 7% 22% 0.60 0.48 0.40 0.40 02 0.24 0.4 0.85 2009 2012 2015 2018 5 .5 -0.5 1.2 -0.2 0.3 -0.2 -0.7 0.5 2.5