Liquidity management and futures hedging under deposit insurance : an option-based analysis

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Title:	Liquidity management and futures hedging under deposit insurance : an option-based analysis
Authors:	Lin, Jyh-horng;Chang, Chuen-ping
Contributors:	淡江大學國際貿易學系暨國際企業研究所
Keywords:	liquidity;futures;deposit insurance;Black-Scholes valuation
Date:	2004-12
Issue Date:	2009-11-30 18:20:54 (UTC+8)
Publisher:	Faculty of Organizational Sciences, Belgrade, Mihajlo Pupin Institute, Belgrade, Economics Institute, Belgrade, Faculty of Transport and Traffic Engineering, Belgrade, Faculty of Mechanical Engineering, Belgrade
Abstract:	Theories on financial futures hedging are generally based on a portfolio-choice approach. This paper presents an alterative: a firm-theoretic model of bank behavior with financial futures under deposit insurance. Assuming that the bank is a certificate of deposit (CD) rate-setter and faces random CDs, expressions for the optimal futures hedge are derived under the option-based valuation. When the bank is in a bad state of the world, a decrease in the short position of the futures decreases the loan rate and increases the CD rate; an increase in the deposit insurance premium increases the loan rate and decreases the CD rate. We also show that the bank’s amount of futures increases with a lower expected futures interest rate.
Relation:	Yugoslav journal of operations research 14(2), pp.209-218
DOI:	10.2298/YJOR0402209L
Appears in Collections:	[Graduate Institute & Department of International Business] Journal Article

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