Katie Hundman did her honors research with Dr. Margaret Chapman on Determinants of Derivative Use by Commercial Banks.

ABSTRACT: Banks' use of financial derivatives has been growing rapidly in recent years due to regulatory changes concerning the amount of capital banks are required to hold as well as an increase in their market risk exposure. Derivatives, namely futures, options and swaps, are off-balance sheet instruments that allow banks to transform the duration of their balance sheets in order to manage market risk without incurring additional capital requirements. However, it has been argued that federal deposit insurance held by banks provides an incentive for banks to speculate with derivatives in an attempt to increase the value of shareholder equity by expanding into activities that shift risk onto the deposit insurer. Speculating with derivatives involves gambling on the future performance of the assets underlying the derivatives in an attempt to reap trading profits. However, using derivatives in such a manner subjects banks to higher rather than lower risk exposure and can lead to significant financial losses. Therefore, it is important from a regulatory perspective to determine how banks are using derivatives. This paper argues that banks engage in derivative activities to reduce their exposure to interest rate risk rather than to increase risk exposure by speculating.

Bryon McCannon did his independent research with Dr. Robert Leekley on Federal Taxes and Cigarette Smoking: A Micro-Analysis of Youth Smoking.

ABSTRACT: The focus of this study is the effect of federal taxes on smoking. The Clinton Administration and others believe that an increase in federal taxes from one dollar to a dollar and fifty cents per pack of cigarettes will substantially reduce the amount of youth smoking in the United States.

This research makes use of two schools of thought to describe the decision to smoke by both adults and youth. One theory states that people act myopically, considering past consumption and current influences, but not adequately considering future costs or benefits. The rational addiction theory says that a person makes smoking decision rationally, taking into consideration past, present and future costs, benefits and influences in decision-making. According to either theory, youth with low levels of past consumption will be more sensitive to changes in price than adults with presumably more stock of addictive consumption.

This analysis uses data from the National Longitudinal Survey of Youth to estimate the overall consumption change due to a federal tax increase and to create a predictive regression model for youths' decision to start smoking. The model controls for influences on a youth in the present and past to estimate influences on the decision to smoke.