Present and Future Values Equations, Transaction Costs and Exchange Rate, As Variables Integrated Into an Algorithm for Debt Restructuring Model

Santillan AG

Published on: 2019-08-14

Abstract

In order to find a fair balance between debtor and creditor in a debt scheme, it could be a complicated challenge, since if the creditor does not recover his money, this would affect his finances. Hence, to achieve a renegotiation between them, the creditor would demand some extra payment for moratoriums and other expenses. Therefore, the aim of the study focusses to demonstrate, through a model of equations that integrate the adjusted values derived from the original promissory notes, the costs incurred by this eventuality of default and finally, with the integration of the variable exchange rate of the currency in which the debt was acquired, all with the purpose of finding a fair balance between debtor and creditor. Therefore, it is suggested to modify the original algorithm proposed by García-Santillán and Vega-Lebrún and reformed in subsequent works to subsequently integrate the variable exchange rate of the currency in which the debt is referenced.

Keywords

Spot exchange rate; Equivalent equations; Transaction cost; Debtor and creditor

Introduction

In some commercial and/or banking operations where a debt or liability is acquired, it necessarily involves two main actors; one of them is the debtor who acquires the debt with his creditor. In this financial operation, the prices of the good or service are stipulated, as well as the possible interest charged for the credit or loan granted, which obviously represents a financial charge for the person who contracts the debt. Over the past decades, the economies of different countries have presented moments of financial turbulence leading to devaluations of the currency of these countries with respect to other currencies. In 2008, García-Santillán and Vega-Lebrún proposed a restructuring model, which focused on the revaluation of the debt at current values, establishing a specific focal date and the new payment scheme. The procedure to revalue the debt focused on the use of present and future values equations. The first step is to calculate each promissory note at present value since the promissory note has not yet expired. Hence, it is revalued to a present value in the focal date. On the other hand, the promissory notes that have expired are calculated at future values, establishing a moratorium interest rate for revaluation. After that, the new payment scheme is established under the same scheme of present and future values equations using a variable X = 1 in order to obtain the value of Y. Originally the proposed algorithm to restructure debts, was the following: