Robert W. Kolb

The systematic risk of futures contracts

Because futures contracts require no investment, the question is whether their returns exhibit and reward systematic risk. Earlier studies using limited data provide mixed answers. Kolb uses a comprehensive database to test (1) whether returns on futures differ significantly from zero, (2) whether systematic risk in the context of the capital asset pricing model (CAPM) exists in commodity futures, and (3) whether systematic risk is rewarded. Data include 33 nonfinancial and 12 financial commodities covering 4,735 contracts and almost 600,000 daily observations during the 1969–92 period.

Financial Derivatives: Pricing and Risk Management

Financial Derivatives explores the contemporary world of financial derivatives, starting with a presumption of only a general knowledge of undergraduate finance. These chapters have been written by many leading figures in academics, industry, and government for the benefit of advanced undergraduates, graduate students, practicing finance professionals, and the general public. As such, the chapters in this book provide a comprehensive understanding of financial derivatives. Financial Derivatives is comprised of 37 chapters organized into six parts.

Too Much Is Not Enough: Incentives in Executive Compensation

The scholarly literature on executive compensation is vast. As such, this literature provides an unparalleled resource for studying the interaction between the setting of incentives (or the attempted setting of incentives) and the behavior that is actually adduced. From this literature, there are several reasons for believing that one can set incentives in executive compensation with a high rate of success in guiding CEO behavior, and one might expect CEO compensation to be a textbook example of the successful use of incentives. Also, as executive compensation has been studied intensively in the academic literature, we might also expect the success of incentive compensation to be well-documented. Historically, however, this has been very far from the case. In Too Much Is Not Enough, Robert W. Kolb studies the performance of incentives in executive compensation across many dimensions of CEO performance. The book begins with an overview of incentives and unintended consequences. Then it focuses on the theory of incentives as applied to compensation generally, and as applied to executive compensation particularly. Subsequent chapters explore different facets of executive compensation and assess the evidence on how well incentive compensation performs in each arena. The book concludes with a final chapter that provides an overall assessment of the value of incentives in guiding executive behavior. In it, Kolb argues that incentive compensation for executives is so problematic and so prone to error that the social value of giving huge incentive compensation packages is likely to be negative on balance. In focusing on incentives, the book provides a much sought-after resource, for while there are a number of books on executive compensation, none focuses specifically on incentives. Given the recent fervor over executive compensation, this unique but logical perspective will garner much interest. And while the literature being considered and evaluated is technical, the book is written in a non-mathematical way accessible to any college-educated reader. Available in OSO:

Options : an introduction

1. The Options Market. 2. Option Payoffs and Option Strategies. 3. Bounds on Option Prices. 4. European Option Pricing. 5. Option Sensitivities and Option Hedging. 6. American Option Pricing. 7. Options on Stock Indexes, Foreign Currency, and Futures. 8. The Options Approach to Corporate Securities. OPTION! Installation and Quick Start Exercises for OPTION!. Index. Appendix.

The management of interest rate risk

T oday’s unprecedented interest rate volatility accentuates the need for bond portfolio managers to hedge against the adversities of interest rate risk. In response to this need, numerous hedging techniques involving the use of financial futures have been proposed. The success of these techniques, however, depends critically upon the hedge ratio used to determine the optimal number of futures contracts to trade per spot market instrument. A survey of the academic literature and talks with portfolio managers reveal an assortment of methods used to determine the hedge ratio, ranging from the naive to the sophisticated. The purpose of this paper is three-fold. First, we clearly define the goal of a hedge, as well as the appropriate factors to consider when determining the hedge ratio. Second, various hedging models currently in use are reviewed, with a discussion of their limitations. Finally, we present a new, more complete hedging model, which will be referred to as the price sensitivity (PS) strategy. The superiority of the PS strategy is illustrated by its ability to account for coupon, yield, and maturity effects, along with changes in the term structure. The remainder of the paper is organized as follows. We first describe the characteristics of a successful hedge and the key factors a manager should consider in any hedging situation. We then review three popular hedging models that are currently in use by practitioners and that also appear in the academic journals. A numerical example for a particular scenario is presented in order to illustrate the hedging effectiveness of each model. Next, the price sensitivity (PS) strategy is introduced and its advantages over its predecessors are analyzed. The final section summarizes the paper’s findings and conclusions. 65

Affiliated and independent banks: Two behavioral regimes

This paper extends recent work on the banking structure. Earlier studies have found different capitalization levels and rates of capital growth, which have been explained as a consequence of the regulatory environment, differential risk tolerance, and portfolio diversification effects. This paper corroborates these earlier efforts and extends the analysis to two further important areas of bank management: dividend behavior and operating policies. Systematic and statistically significant differences between the two classes of banks are found, helping to explain the previously observed differences in capital management. The major differences in dividend, operating, and capital management behavior lead to the conclusion that the two banks belong to two behavioral regimes. This view has important implications for regulation and future empirical research.