The effect of derivatives on profitability of the banks: A practice for Turkish banking sector

Banks are businesses that offer a profitable and reliable service while protecting public interests. Banks, whose primary function is to convert deposits to loans, manages their funds by performing transactions also in different markets as well as financial intermediation function. In this sense, futures markets are markets where banks are heavily traded by means of protection, speculation and arbitrage. It is called derivative products with instruments traded in futures markets and the best known are forward, future, options and swaps. While the use of derivative products of banks increases their liquidity levels profitability and borrowing capacities, by taking advantage of arbitrage utilization they can reduce resource costs and provide access to international financial markets. Derivative products enable banks and institutions operating in different sectors to increase their profitability, to manage their current risks, to make the financial system flexible, to contribute positively to the global economy and to increase the economic growth rate. Considering these effects, whether the effect of using derivative products on banking profitability exists empirically is the problem statement of the research. The aim of the study, is to test the effect of using derivative products on bank profitability in the Turkish banking sector. In the study in which panel data regression analysis method was applied for the period of 2008-2018, it was found that there was not relationship between derivative product use and bank profitability. The findings are compatible with their workings of Hundman (1998), Hentschel and Smith Jr.'s (1997) in the literature. Keywords: Derivative Products, Bank Profitability, Turkish Banking Sector, Panel Data Regression Analysis