Optimal bank asset and liability management with financial futures

This paper presents a model for optimal bank asset and liability management with financial futures. This model is a multiperiod linear programming model based on Markowitz portfolio theory. Given the bank's initial position, its economic forecasts, and the constraints under which it operates, the model can help a bank's senior executives determine the current and expected future balance sheet composition and financial futures position which will minimize the bank's operating risks and which will meet the bank's expected profits goal with the minimum possible profits risk. By parametrically varying the expected profits goal, the model will generate the set of risk‐return efficient decisions. Bankers need then examine only the set of efficient decisions to choose their optimal solution. A simplified example is used to illustrate the application of our model and to demonstrate that banks that use financial futures in asset and liability management can obtain better results than banks that do not use financial futures.