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Bankruptcy Valuation Considerations with Exchange Traded Derivatives

By: John Trefethen, Director & Co-Founder

Valuation is an integral part of the bankruptcy process. Throughout the bankruptcy code there are requirements to value the assets and liabilities of the filing company. Among the most challenging items to value are financial products, in particular financial derivatives. Derivatives can be placed in one of two categories – 1) exchange traded, and 2) over-the-counter (“OTC”). This article’s focus will be on exchange traded derivatives. I will follow-up with an article on OTC derivatives in the near-future. Exchange traded derivatives are predominantly futures and options, which require valuation in a bankruptcy. A futures contract is simply a contract specifying that a buyer purchase, or a seller sell, an underlying asset at a defined quantity, price, and date sometime in the future. Futures contracts are traded on the exchanges and are available in various asset classes including contracts linked to agriculture, metals, energy, stock indices, interest rates, cross currency pairs and even forecasted weather conditions. An option is a derivative that grants the option holder the right, but not the obligation, to buy or sell an underlying asset at a pre-specified date and quantity. Like futures contracts, there are myriad assets that can be linked to an option. They are linked to individual company stocks, equity indices, exchange traded funds, volatility of the S&P 500 (VIX), bonds, interest rates, currencies and like futures, even the weather. Having an independent, third-party calculate fair value(s), provide documentation on the valuation methodology, and certify to their reasonableness will give you comfort knowing that you are receiving reliable values that can be used in a bankruptcy proceeding. HedgeStar maintains licenses and agreements with the various exchanges in order to have access to current and accurate market data on futures contracts. HedgeStar values a broad range of financial instruments, from plain vanilla to exotic. We have extensive experience valuing domestic municipal and corporate bonds, international debt, illiquid securities, stock warrants and options, and all forms of interest rate, currency and commodity derivatives. As a leading independent valuation agent, HedgeStar is uniquely qualified to help with bankruptcy proceedings to meet the valuation requirements related to financial assets and liabilities.


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