DrugKing transfers a financial asset, its investment in a debt security, to Insu

Question

DrugKing transfers a financial asset, its investment in a debt security, to InsureAll, a substantive third party (i.e., the transaction does not involve a QSPE). The asset is traded publicly (i.e., it is readily obtainable in the marketplace). DrugKing holds a conditional call that is attached to the asset. This call will permit DrugKing to repurchase the asset if LIBOR ever decreases below 4 percent (LIBOR was 6.5 percent as of the date of transfer). The option has a fixed exercise price and provides more than a trivial benefit to DrugKing. Outside counsel for DrugKing concludes that the transfer isolates the transferred asset (i.e., the assets have been put presumptively beyond the reach of DrugKing and its creditors, even in bankruptcy or other receivership).

Explanation / Answer

fact of question

Drugking have transfered financial assets which is debt security, this assets is traded publicly and Drugking holds conditional call which attach with assets, call option gives right to repurchased the assets if libor decreases below 4 % presently libor is 6.5 % as on date of transfer.,it is not effect on financial assets even in bankruptcy or other receivership.

Conclousion,

call option gives right to purchase assets if substantial assets price increased from market and call holder gives obligation to sell substantial assets.

Here, Drugking has hedge postion agains deb security so it has purchased call option exercised price 4% and LIBOR is presently 6.5 %, It has hedged postion through call option it is beneficial to call holder i.e Drugking.  

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