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Is sovereign debt so different from corporate debt that there is no need for bankruptcy procedures to handle potential defaults? The basic tools of finance seem to confirm that, without water-tight sovereign immunity, creditors face a Prisoner’s Dilemma: litiginous creditors may be tempted to...
Persistent link: https://www.econbiz.de/10005656241
We analyze optimal hedging contracts and show that although hedging aims at sharing risk, it can lead to more risk-taking. News implying that a hedge is likely to be loss-making undermines the risk-prevention incentives of the protection seller. This incentive problem limits the capacity to...
Persistent link: https://www.econbiz.de/10010686736
We study the optimal design of clearing systems. We analyze how counterparty risk should be allocated, whether traders should be fully insured against that risk, and how moral hazard affects the optimal allocation of risk. The main advantage of centralized clearing, as opposed to no or...
Persistent link: https://www.econbiz.de/10010686807