A Study on The Impact of Derivatives on Bank Risk and Profitability

This paper examines the impact of derivatives on bank risk and profitability, with a sample of 25 banks from developed markets during the period 2015 to 2019. The main findings suggest that banks’ use of financial derivatives has decreased bank risk. The major variables include Total Risk, Idiosyncratic Risk, and Systematic Risk. This decrease in risk can be linked to the use of derivatives, to reduce or hedge the risks involved in the bank’s operations. This study also shows that the use of financial derivatives has no significant relationship with a bank’s profitability. Overall, this study contributes to understanding the impact of derivatives use on bank risk and profitability and the consequences of a bank’s business model choice.