Smart derivative contracts: detaching transactions from counterparty credit risk

Introducing deterministic termination rules to eliminate counterparty risk in smart derivatives

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Christian Fries and Peter Kohl-Landgraf describe a smart derivative contract with a fully deterministic termination that removes many of the inefficiencies in collateralised over-the-counter transactions. The automatic and deterministically defined termination procedure in the smart contract represents an option right. This feature replaces counterparty credit risk with contractually defined termination risk

We consider a special variant of a smart derivative

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