The use of financial futures in production credit associations

摘要

This study examines the use of financial futures in optimal balance sheet composition for a representative Production Credit Association in Kansas, taking into account the dynamics of stochastic interest rates and the sequential nature of decisions.Previous research in the banking literature has indicated that the use of financial futures may not necessarily reduce risk due to discretionary hedging and/or correlation of interest rate with other financial variables. Brodt's model of Canadian banksis adapted to a Production Credit Association. In addition, discretionary hedging and correlation with loan demand is modelled using discrete stochastic programming. Results indicate that use of financial futures by Production Credit Associations increases profit and at the same time increases risk. A risk-return ratio of roughly 1.1:1 must be accepted if the institution is maximizing expected profit, though the increase in profit is not large. The use of futures by boards of directors which are more risk averse results in a lower risk-return ratio.