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Analysing UDROP: An Instrument for Stabilizing the International Financial Architecture[Note 1. I would like to thank Birgitta Weitz and two ...]
Author(s) -
Lindner Axel
Publication year - 2001
Publication title -
international finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.458
H-Index - 39
eISSN - 1468-2362
pISSN - 1367-0271
DOI - 10.1111/1468-2362.00065
Subject(s) - moral hazard , maturity (psychological) , economics , debt , architecture , financial crisis , financial instrument , hazard , finance , actuarial science , macroeconomics , microeconomics , incentive , political science , art , chemistry , organic chemistry , law , visual arts
This paper analyses implications of a proposal, called UDROP, to reform the standards of international debt contracts. The idea is to give borrowers a roll‐over option at maturity for a specified length of time. Using recently developed models of financial crises, the paper shows for which type of crisis UDROP is beneficial. Moral hazard of the borrower is one of the problems UDROP faces which can be addressed by appropriately designing the debt contract.