Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/100758 
Year of Publication: 
1996
Series/Report no.: 
Working Paper No. 96-6
Publisher: 
Federal Reserve Bank of Atlanta, Atlanta, GA
Abstract: 
This paper develops a model in which information losses may be an important part of the cost of an OTC derivatives dealer's failure. A dealer failure forces solvent counterparties of a failed dealer to seek replacement hedges with other dealers. However, by forcing good firms into the derivatives market, the failure provides camouflage for insolvent firms seeking to speculate with a dealer that does not know their credit status. The paper models this information loss and uses the model to quantitatively evaluate a range of scenarios. The results suggest that a market breakdown is unlikely but not quite impossible.
Subjects: 
Derivative securities
Liquidity (Economics)
Document Type: 
Working Paper

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