Abstract
We study the effects of a derivatives supply shock on corporate hedging based on counterparty derivative provision in the Over-the-Counter market. We find that corporate hedging programs are fragile. When a firm’s counterparty in derivative transactions suffers losses on its loan portfolio, the firm is more likely to lose access to this type of hedging. Affected firms respond by increasing their savings rate and preserving access to corporate lines of credit. These results are not present in a counterfactual experiment that involves capital shocks to the firm’s lenders who do not act as counterparties in over-the-counter derivative transactions.
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