The effect of speculation and hedging purpose derivative instruments use on the interest rate risk and exchange rate risk of the banks: A study on banks listed in Istanbul Stock Exchange

The rapid development and change of technology in the financial system and the disappearance of the borders in the globalizing world cause the diversification of risks that all the institutions and individuals within the system are exposed to, and the increase of ambiguities. Especially after the expiration of the fixed exchange rate regime, the sudden fluctuations in exchange rates according to supply and demand and the increasing uncertainty put institutions at exchange rate risk. Within this period, the interest rate fluctuations occurring in international markets also created the interest rate risk. Due to the increase of the need of protection from risk and ambiguity, financial institutions have developed new financial instruments to eliminate those risks. The increase of incurred risks caused the derivatives previously applied for merchandise to be used for hedging. Risk management with derivative products and risk have become significant among the banks, which are the most important players of the financial system. In this study, the relationship between the use of derivative instruments for speculation and hedging in banks and interest and exchange rate risks have been investigated with panel data analysis method by using 6-month data for during 2010-2018 period. It was identified in the study that there is a significant and negative relationship between the use of derivatives for speculative purposes and exchange risk. However, there was no relationship identified between the use of derivatives for hedging purposes and exchange rate risk. On the other hand, there is a significant and negative relationship between the use of derivatives for speculative and hedging purposes and interest rate risk. Keywords: Derivative ınstruments, exchange rate risk, ınterest rate risk, panel data