TY  - JOUR
AU  - Froot,Kenneth A.
AU  - Stein,Jeremy C.
TI  - Risk Management, Capital Budgeting and Capital Structure Policy for     Financial Institutions: An Integrated Approach
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 5403
PY  - 1996
Y2  - January 1996
UR  - http://www.nber.org/papers/w5403
L1  - http://www.nber.org/papers/w5403.pdf
N1  - Author contact info:
Kenneth A. Froot
Graduate School of Business
Harvard University
Soldiers Field
Boston, MA 02163
Tel: 617/495-6677
Fax: 617/496-7357
E-Mail: kfroot@hbs.edu

Jeremy C. Stein
Department of Economics
Harvard University
Littauer 209
Cambridge, MA  02138
Tel: 617/496-6455
Fax: 617/496-7352
E-Mail: jeremy_stein@harvard.edu
AB  - 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 positions.
ER  -