Morgan and Shome are from the Department of Finance at Virginia Polytechnic Institute and State University, and Smith is from the College of Management, Georgia Institute of Technology. The authors gratefully acknowledge the contributions of two anonymous referees of this Journal.
Optimal Futures Positions for Large Banking Firms
Article first published online: 30 APR 2012
1988 The American Finance Association
The Journal of Finance
Volume 43, Issue 1, pages 175–195, March 1988
How to Cite
MORGAN, G. E., SHOME, D. K. and SMITH, S. D. (1988), Optimal Futures Positions for Large Banking Firms. The Journal of Finance, 43: 175–195. doi: 10.1111/j.1540-6261.1988.tb02596.x
- Issue published online: 30 APR 2012
- Article first published online: 30 APR 2012
In this paper, we extend earlier work on hedging models so that uncertainty about both deposit supply and loan demand is incorporated as well as random rates of return on loans and CD's. Our model suggests that the optimal forward position is the sum of three ratios that should be estimated simultaneously. Using bank-specific data, the optimal hedge ratios are estimated in both the pre-deregulation and deregulation subperiods. Our results show that previous studies of bank hedging with interest rate futures have greatly overstated (a) the volume of short futures positions that banks should take and (b) the degree of homogeneity of optimal hedge ratios across the banking system. Similarly, deregulation has not uniformly affected the interest rate risk borne by different institutions.