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1998 Survey of Derivatives and Risk Management Practices by U.S. Institutional Investors

FIN Working Paper No. 99-074

44 Pages Posted: 1 Mar 2000  

Richard M. Levich

New York University - Stern School of Business; National Bureau of Economic Research (NBER)

Gregory S. Hayt

Rutter Associates LLC

Beth A. Ripston

KPMG LLP, Montvale

Date Written: October 1999

Abstract

This paper presents the results of a survey of U.S. institutional investors regarding their use of derivative securities and risk management practices. The survey focuses on three categories of institutional investors - pension plan sponsors, college and university endowments, and private foundations. Among many findings, we report that 46% of institutions permit their asset managers to use derivatives. The fraction permitting the use or derivatives ranges from 63% for pension plan sponsors, to 38% among college and university endowments and to 28% for private foundations. Of those institutions that permit derivatives use, only 59% reported open derivatives positions as of year-end 1997. Thus, only 27% of all respondents to the survey reported outstanding derivatives positions. However, other evidence suggests, that this is a conservative estimate of derivatives positions. Where derivatives are used, the positions tend to be small relative to total assets. The modal notional value of derivatives as a percent of assets is 1.0%, while the median value is 5.0%. Risk governance surrounding derivatives at institutional investors appears to be less intensive than at banks and securities dealers. However, the large majority of institutions (80%) place some limitations on the nature or extent of derivatives activity among internal or external managers.

JEL Classification: G1, G11, G23

Suggested Citation

Levich, Richard M. and Hayt, Gregory S. and Ripston, Beth A., 1998 Survey of Derivatives and Risk Management Practices by U.S. Institutional Investors (October 1999). FIN Working Paper No. 99-074. Available at SSRN: https://ssrn.com/abstract=204388 or http://dx.doi.org/10.2139/ssrn.204388

Richard M. Levich (Contact Author)

New York University - Stern School of Business ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0422 (Phone)
212-995-4256 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Gregory S. Hayt

Rutter Associates LLC ( email )

130 West 57th Street
Suite 4A
New York, NY 10019
United States
(212) 977-1076 (Phone)

Beth A. Ripston

KPMG LLP, Montvale ( email )

Montvale Executive Office
Three Chestnut Ridge Road 345 Park Avenue, 27th Floor New York, NY 10154
Montvale, NJ 07645-0435
United States
(212) 872-7764 (Phone)

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