Risk Management, Capital Budgeting and Capital Structure Policy for Financial Institutions: An Integrated Approach
We develop a framework for analyzing the capital allocation and capital structure decisions facing financial institutions such as banks. Our model incorporates two key features: I) value-maximizing banks have a well-founded concern with risk management; and ii) not all the risks they face can be frictionlessly hedged in the capital market. This approach allows us to show how bank-level risk management considerations should factor into the pricing of those risks that cannot be easily hedged. We examine several applications, including: the evaluation of proprietary trading operations; and the pricing of unhedgeable derivatives portfolios. <p>This paper was presented at the Financial Institutions Center's May 1996 conference on "
Year of publication: |
1996-05
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Authors: | Froot, Kenneth A. ; Stein, Jeremy C. |
Institutions: | Financial Institutions Center, Wharton School of Business |
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