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Netting agreements and the credit exposures of OTC derivatives portfolios

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  • Darryll Hendricks
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    Abstract

    The rapid expansion of the over-the-counter derivative market has prompted dealers to lessen their credit risk exposure by adopting bilateral closeout netting agreements. This article shows that netting agreements will not only reduce current credit exposure but under certain circumstances will also dampen fluctuations in the volatility of dealers' exposures. Thus, netting agreements may limit potential credit exposure, or the possibility that credit exposure will increase over a fixed time horizon.

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    File URL: http://www.newyorkfed.org/research/quarterly_review/1994v19/v19n1article2.pdf
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    Bibliographic Info

    Article provided by Federal Reserve Bank of New York in its journal Quarterly Review.

    Volume (Year): (1994)
    Issue (Month): Spr ()
    Pages: 7-18

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    Handle: RePEc:fip:fednqr:y:1994:i:spr:p:7-18:n:v.19no.1

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    Keywords: Derivative securities;

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    Cited by:
    1. William Bergman & Robert Bliss & Christian Johnson & George Kaufman, 2004. "Netting, financial contracts, and banks: the economic implications," Working Paper Series WP-04-02, Federal Reserve Bank of Chicago.
    2. Tsetsekos, George & Varangis, Panos, 1998. "The structure of derivatives exchanges : lessons from developed and emerging markets," Policy Research Working Paper Series 1887, The World Bank.

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