Date of Award

Spring 2013

First Advisor

Scott Moore

Abstract

"A derivative in its simplest terms is a contract between two parties about the value of an underlying asset. The parties can initiate these contracts in two ways, on large, standardized exchanges, or privately between two parties in the Over the Counter (OTC) market. Over the Counter derivatives have been identified as a contributing factor to the financial crisis in 2008. This is partially because the OTC derivatives market is exposed to a large amount of counterparty risk, or the risk that the other party involved in the contract will default on payment of the derivative contract. While counterparty risk in the OTC market might sound like it is simply the same type of default risk in other financial markets, the concentration of contracts around relatively few key financial institutions and size of the market make the economy increasingly subject to the risk of a default in this market (Shinasi, 2001)."

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