Netting and the Design of Financial Contracts with Default Risk
London Business School Institute of Finance and Accounting Working Paper 205
Posted: 3 Jul 1998
Date Written: Undated
Abstract
We demonstrate, using a simple model, how netting as a design feature of financial contracts has a major effect on default risk. Under general conditions netting of cash flows within a contract is shown to eliminate all first-order effects of default risk. We state the model as both a "hazard rate" model and a "firm value" model to show the equivalence of these two apparently different approaches. We also discuss how this result would apply to netting between different contracts.
JEL Classification: G10, G20
Suggested Citation: Suggested Citation
Cooper, Ian Anthony and Mello, Antonio S., Netting and the Design of Financial Contracts with Default Risk (Undated). London Business School Institute of Finance and Accounting Working Paper 205, Available at SSRN: https://ssrn.com/abstract=7188
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