1. Valuation Adjustment Mechanism (VAM), also known as “bet-on agreement,” is a type of contract commonlyusedinprivateeq
Posted: Sat Feb 26, 2022 9:04 am
1. Valuation Adjustment Mechanism (VAM), also known as “bet-on
agreement,” is a type of contract commonlyusedinprivateequity
investment activities.
Aproducerspent0.20billionChineseYuan(CNY)onmakingamovie Warrior
Doggie II. The producer then entered into a
VAMagreementwithamoviedistributor. According to the VAM, the
distributor pays 0.22 billion CNY to the producer and, in return,
can retain part of the box office revenue. Specifically, the
distributor obtains 12% of the first 0.8 billion CNY of the
revenue, 25% of the revenue between 0.8 and1.5 billion CNY, and
15%oftherevenueexceeding 1.5 billion CNY. The distributor then
transfers the rest of the box office revenue to the movie producer.
For simplicity, assume that the distributor’s operational cost is
zero.
1. Is this VAM a derivative contract? If not, why? If yes, what
is the underlier of this contract?
2.What is the minimum profit for the movie producer? What is the
maximum loss of the distributor?
When does the distributor break even, i.e. earn zero profit?
4.In previous questions, we assume that no one defaults. Does
the producer bear any counter-party credit risk? In other words,
will the distributor ever default on the VAM agreement and why?
agreement,” is a type of contract commonlyusedinprivateequity
investment activities.
Aproducerspent0.20billionChineseYuan(CNY)onmakingamovie Warrior
Doggie II. The producer then entered into a
VAMagreementwithamoviedistributor. According to the VAM, the
distributor pays 0.22 billion CNY to the producer and, in return,
can retain part of the box office revenue. Specifically, the
distributor obtains 12% of the first 0.8 billion CNY of the
revenue, 25% of the revenue between 0.8 and1.5 billion CNY, and
15%oftherevenueexceeding 1.5 billion CNY. The distributor then
transfers the rest of the box office revenue to the movie producer.
For simplicity, assume that the distributor’s operational cost is
zero.
1. Is this VAM a derivative contract? If not, why? If yes, what
is the underlier of this contract?
2.What is the minimum profit for the movie producer? What is the
maximum loss of the distributor?
When does the distributor break even, i.e. earn zero profit?
4.In previous questions, we assume that no one defaults. Does
the producer bear any counter-party credit risk? In other words,
will the distributor ever default on the VAM agreement and why?