I develop a model with two assets in which the hedging activity of derivatives dealers, interacting with market illiquidity, distorts the covariance structure of the market. I apply the model to hedging of counter party risk, and find strong support for the model's key predictions. Using...

We consider the option value of cash when nominal interest rates are no longer constrained by the zero lower bound. We provide a general valuation principle and solve for the value of cash in semi-closed form under Vasicek (1977) dynamics for the nominal short rate. In the absence of a zero...

We study trading at settlement (TAS) in which orders are priced at a differential to the not-yet-known daily settlement price. In our model, TAS mitigates adverse selection for patient liquidity traders, but imposes a negative externality on other market participants by “cream-skimming”...