Abstract

http://ssrn.com/abstract=1967026
 
 

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Banks, Price Risk, and Derivatives: Evidence and Implications for the Volcker Rule and Fair-Value Accounting


Jeff Downing


NHH Norwegian School of Economics

March 20, 2012


Abstract:     
In this study, I focus on banks' trading operations--namely, I examine banks' derivative use in hedging their price risk on trading assets. My two central findings are that banks use derivatives to hedge this risk and that derivatives are effective in hedging this risk. As an example, suppose that a bank holds in its trading book some US Treasuries and thus has price risk in interest rates: My first finding says that this bank uses interest-rate derivatives to hedge this risk; my second says that when interest rates change, this bank's derivatives dampen its net profit or loss on its Treasuries. These findings suggest that derivatives are a useful risk-management tool in mitigating the price risk of banks. These findings have implications for the Volcker Rule and for fair-value accounting.

Number of Pages in PDF File: 21

Keywords: banks, derivatives, price risk, hedging, trading operations, Volcker Rule, fair-value accounting

JEL Classification: G21, G28

working papers series


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Date posted: December 1, 2011 ; Last revised: March 21, 2012

Suggested Citation

Downing, Jeff, Banks, Price Risk, and Derivatives: Evidence and Implications for the Volcker Rule and Fair-Value Accounting (March 20, 2012). Available at SSRN: http://ssrn.com/abstract=1967026 or http://dx.doi.org/10.2139/ssrn.1967026

Contact Information

Jeff Downing (Contact Author)
NHH Norwegian School of Economics ( email )
Helleveien 30
Bergen
Norway
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