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Should derivatives be privileged in bankruptcy?

Bolton, Patrick and Oehmke, Martin (2015) Should derivatives be privileged in bankruptcy? Journal of Finance, 70 (6). pp. 2353-2394. ISSN 0022-1082

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Identification Number: 10.1111/jofi.12201

Abstract

Derivatives enjoy special status in bankruptcy: they are exempt from the automaticstay and effectively senior to virtually all other claims. We propose a corporate financemodel to assess the effect of these exemptions on a firm’s cost of borrowing and in-centives to engage in derivative transactions. While derivatives are value-enhancingrisk management tools, seniority for derivatives can lead to inefficiencies: it trans-fers credit risk to debtholders, even though this risk is borne more efficiently in thederivative market. Seniority for derivatives is efficient only if it provides sufficientcross-netting benefits to derivative counterparties that provide hedging services.

Item Type: Article
Official URL: http://onlinelibrary.wiley.com/journal/10.1111/(IS...
Additional Information: © 2015 The American Finance Association
Divisions: Finance
Subjects: H Social Sciences > HG Finance
Sets: Departments > Finance
Date Deposited: 09 Oct 2017 13:40
Last Modified: 20 Jun 2020 02:05
URI: http://eprints.lse.ac.uk/id/eprint/84512

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