ways to manage risk of which one of the most important forms is interest rate risk. In this paper we use the mean … on how interest rate risk affects optimal bank investment in the loan and deposit market when derivatives are available …

risk. We show that the firm always chooses its optimal debt-equity ratio to minimize the weighted average cost of capital … introduction of the background risk affects neither the optimal debt-equity ratio nor the marginal rate of technical substitution … of the background risk induces the firm to acquire less capital by issuing less debt and equity. -- Background risk …