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Abstract


THE EFFECT OF DERIVATIVE INSTRUMENTS USE ON BANKING INTEREST RATE RISK AND EXCHANGE RISK: AN APPLICATION ON BIST BANKING SECTOR

The developments in information and communication technology in the last 30 years have affected the banking sector significantly as in all sectors. Thanks to these developments, the banking sector has revealed both the possibility of performing transactions in a shorter time and the ability to cope with different types of risks. From this point on, it is started to discuss the situation of what can be done in order to reduce costs or to protect against these risks in the banking sector. After these developments, the technological innovations in the banking sector and banks have started to turn to the use of derivative instruments by improving their risk-oriented services. Derivative instruments are among the primary measures that banks can take against rising risks. At this point, the relationship between the use of derivative instruments and the risk management practices against the interest rate and currency risk that the banks are exposed to, reveals the main purpose of the study. In order to reveal this relationship, the relationship between the banks' speculation or hedge derivative instruments representing the main subject of the study and the exchange rate and interest rate risk was analyzed. The purpose of this study is to reveal the relationship between the use of derivative instruments for the purpose of speculation and hedge of commercial banks in BIST 100 between 2005 and 2018, and interest and exchange rate risks by using panel data analysis method. In line with the variables used in the research, two different panel regression models were created. In the study, two different models, interest and exchange rate risk, are considered as dependent variables. As a result of the study, it has been observed that the use of derivative instruments for speculation and hedging for interest purposes has decreased in some cases such as increasing the profitability of banks in predictable interest movements, speculating in times of high volatility in the market by performing speculative transactions at times of profitability. In addition, in cases where the exchange rate risk is a dependent variable, the existence of a significant and negative relationship with hedging and speculation as independent variables, banks used derivative instruments both in order to gain profit from this movement and to protect them during periods when volatility movements in exchange rates are frequently experienced, it is seen that they use more derivative products in order to make profit. In other words, it was determined that banks reduced the exchange rate risk by applying derivative products in a way to make a profit in foreign currency fluctuation by analyzing the market well during periods of high volatility movements.



Keywords
Exchange Rate Risk, Interest Rate Risk, Derivative Instruments, Panel Data Analysis


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