Abstract
In this paper, we study how large banking firms may use hedging instruments to ensure against interest rate risk and how the optimal bank interest margin or spread decision is affected by financial hedging. We find that optimal interest margin management does not depend upon the attitude towards risk of the bank managers and the distribution function of the random interbank funding costs if the set of futures markets is complete. Then we investigate assets and liabilities management of banks in the presence of basis risk, i.e., in an incomplete set of futures markets. We show that in both cases there is a value of hedging for the banking firm.
Jack Wahl would like to thank Gunter Dufey for his encouragement and friendship, especially while he was holding a visiting position at the University of Michigan Business School, Ann Arbor.
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© 2000 Springer-Verlag Berlin Heidelberg
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Wahl, J.E., Broil, U. (2000). Financial Hedging and Banks’ Assets and Liabilities Management. In: Frenkel, M., Hommel, U., Rudolf, M. (eds) Risk Management. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-662-04008-9_12
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DOI: https://doi.org/10.1007/978-3-662-04008-9_12
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