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Editing Contracts/Novation
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==Application in financial markets== | ==Application in financial markets== | ||
[ | [http://chicagofed.org/digital_assets/publications/understanding_derivatives/understanding_derivatives_chapter_1_derivatives_overview.pdf: Novation] is also used in [[Futures contract|futures]] and [[Option (finance)|options]] trading to describe a special situation where the [[Clearing house (finance)|central clearing house]] interposes itself between buyers and sellers as a legal counter party, i.e., the clearing house becomes buyer to every seller and vice versa. This obviates the need for ascertaining credit-worthiness of each counter party and the only [[credit risk]] that the participants face is the risk of the clearing house defaulting. In this context, novation is considered a form of [[financial risk management|risk management]]. | ||
The term is also used in markets that lack a centralized clearing system, such as [[Swap (finance)|swap]] trading and certain [[Over-the-counter (finance)|over-the-counter (OTC)]] [[Derivative (finance)|derivatives]], where "novation" refers to the process where one party to a contract may assign its role to another, who is described as "stepping into" the contract. This is analogous to selling a future contract. | The term is also used in markets that lack a centralized clearing system, such as [[Swap (finance)|swap]] trading and certain [[Over-the-counter (finance)|over-the-counter (OTC)]] [[Derivative (finance)|derivatives]], where "novation" refers to the process where one party to a contract may assign its role to another, who is described as "stepping into" the contract. This is analogous to selling a future contract. |