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Bank Funding Risks, Risk Aversion, and the Choice of Futures Hedging Instrument

1985; Wiley; Volume: 40; Issue: 1 Linguagem: Inglês

10.2307/2328058

1540-6261

Gary D. Koppenhaver,

Insurance and Financial Risk Management

The Journal of FinanceVolume 40, Issue 1 p. 241-255 Article Bank Funding Risks, Risk Aversion, and the Choice of Futures Hedging Instrument G. D. KOPPENHAVER, G. D. KOPPENHAVER Federal Reserve Bank of Chicago. The author is grateful to George Kaufman and Randall Merris for helpful comments and suggestions. All errors remain the author's responsibility alone. All views expressed here are those of the author and are not necessarily those of the Federal Reserve Bank of Chicago or the Federal Reserve System.Search for more papers by this author G. D. KOPPENHAVER, G. D. KOPPENHAVER Federal Reserve Bank of Chicago. The author is grateful to George Kaufman and Randall Merris for helpful comments and suggestions. All errors remain the author's responsibility alone. All views expressed here are those of the author and are not necessarily those of the Federal Reserve Bank of Chicago or the Federal Reserve System.Search for more papers by this author First published: March 1985 https://doi.org/10.1111/j.1540-6261.1985.tb04947.xCitations: 25 Read the full textAboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onEmailFacebookTwitterLinkedInRedditWechat ABSTRACT Currently, theories of financial futures hedging are based on either a portfolio-choice approach or a duration approach. This article presents an alternative: a firm-theoretic model of bank behavior with financial futures. Assuming the bank is uncertain about cash CD interest rates and the quantity of CDs it needs in the future, expressions for the optimal futures hedge are derived under constant absolute risk aversion and constant relative risk aversion. The performance of these two strategies is estimated from 1981–1983 using either the recently developed CD futures contract or the T-Bill futures contract. These results are also compared with the performance of a portfolio-choice strategy and a routine hedging strategy. The analysis indicates that the CD futures market can serve a hedging purpose that is not served by the previously established T-Bill futures market. REFERENCES 1G. O. Bierwag, G. C. Kaufman, and A. Toevs. "Duration: Its Development and Use in Bond Portfolio Management." Financial Analysts Journal 39 (JulyAugust 1983), 15–35. 2P. Ciccehetti, C. Dale, and A. Vignola. 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Quarterly Journal of Economics 95 (September 1980), 309–31. 15M. Rubinstein. "The Valuation of Uncertain Income Streams and the Pricing of Options." Bell Journal of Economics 7 (Autumn 1976), 407–25. 16C. Sealey, Jr. "Deposit Rate-Setting, Risk Aversion, and the Theory of Depository Financial Intermediaries." The Journal of Finance 35 (December 1980), 1139–54. 17J. K. Speakes. "The Phased-in Money Market Certificate Hedge." Journal of Futures Markets 3 (Fall 1983), 185–90. 18E. T. Veit and W. W. Reiff. "Commercial Banks and Interest Rate Futures: A Hedging Survey." Journal of Futures Markets 3 (Fall 1983), 283–93. Citing Literature Volume40, Issue1March 1985Pages 241-255 ReferencesRelatedInformation