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Abstract
While bankers are properly concerned with activities that could threaten safety and soundness, misconceptions about the risk management role of futures and options can impede prudent banker behavior. Successful risk management requires careful communication among loan officers, customers, and top managers, A thorough awareness of risk management and market dynamics can help clarify the difference between speculation and hedging. In rating major financial institutions, for example, Standard & Poors Credit Rating department looks for a sound management program with ample systems and controls in place to manage the risk. In rating mutual funds, S&P gives higher ratings to those funds that use exchange-traded futures and options to manage interest rate risk. Likewise, the Bank for International Settlements regards futures as relatively safe with regard to credit risk. Overall, lenders must balance concerns for liability stemming from malfunctioning hedges and liability for failing to consider the potential benefits of hedging.