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| Author: | Froot, K. A. Stein, J. C. |
| Title: | Risk management,capital budgeting, and capital structure policy for financial institutions: an integrated approach. |
| Journal: | Journal of Financial Economics
1998 : JAN, VOL. 47:1, p. 55-82 |
| Index terms: | RISK MANAGEMENT CAPITAL BUDGETING CAPITAL STRUCTURE OF COMPANIES FINANCIAL INSTITUTIONS RESOURCE ALLOCATION BANKS |
| Language: | eng |
| Abstract: | The authors develop a framework for analyzing the capital allocation and capital structure decisions facing financial institutions. Their model incorporates two key features: value-maximizing banks have a well-founded concern with risk management; and 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. They examine several applications, including the evaluation of proprietary trading operations, and the pricing of unhedgeable derivatives positions. They also compare their approach to the RAROC methodology that has been adopted by a number of banks. |
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