Impact of financial risks on the use of derivative instruments: An application to the Turkish banking sector

Majority of the financial system consists of banks. Fluctuations in financial markets affect the banking sector. With the financial risks in banks becoming important, the degree of impact of market fluctuations on banks has also changed. The need for protection from financial risks in both financial markets and banking sector has emerged. Derivative instruments are widely used in the management and minimization of financial risks. Accordingly, the study aimed to determine the impact of financial risks on the use of derivative instruments by using the data of banks operating in the BIST Bank Index. For this purpose, the relationship between financial risks and the use of derivative instruments was analyzed by panel data method using data from seven banks trading stocks in the BIST Bank index between 2010 and 2018. Therefore, the use of derivative instruments for speculation (SPECK) and hedging (HED) purposes for use in analysis was determined as a dependent variable; debt risk, interest rate risk, credit risk, currency risk and capital risk were also determined as independent variables, two panel regression model was setted. As a result of the analysis, significant relationship was determined between debt risk, interest rate risk, exchange rate risk and the use of derivative instruments for speculation purposes for Model 1; but it has been determined that debt risk is positively affected, and interest rate risk and exchange rate risk are also negatively affected. It has been determined that there is no significant relationship between credit risk and capital risk and the use of derivative instruments for speculation purposes. Model 2, there is a significant and negative relationship was determined between interest rate risk, credit risk, exchange rate risk and capital risk and the use of derivative instruments for hedging purposes; but it was determined that there was no significant relationship between debt risk and the use of derivative instruments for hedging purposes.