Derivative activities and the risk of international banks: A market index and VaR approach

Derivative activities and Chinese banks’ exposures to exchange rate and interest rate movements

“…Chaudhry et al (2000) find that options increase US banks' exposure, but swaps reduce it. Similar results are reported by Reichert and Shyu (2003) in the case of Japanese banks. Finally, several studies, including, Dumas and Solnik (1995), De Santis and Gerard (1998) and Patro et al (2002), show that the exchange rate exposure of equity indices is not constant over time and that exposure is likely to be price only when time-variation is allowed.…”

“…We are particularly interested in examining the impact of derivatives trading on the risk profile of Chinese banks. Previous studies, including Choi and Elyasiani (1997), Chaudhry et al (2000) and Reichert and Shyu (2003), apply the crosssectional regressions to estimate the association between banks' foreign exchange exposure and derivative instruments. Nguyen et al (2007) and Au Yong et al (2009), among others, also use cross-sectional regressions to investigate the determinants of interest rate exposure.…”

“…However, derivative trading may lead to excessive risk taking in countries with a weaker regulatory environment (Furman and Stiglitz 1998). Existing studies on the impact of derivative activities on the risk exposure of banks focus mainly on well-developed banking markets, such as the US (see, for example, Choi and Elyasiani 1997;Chaudhry et al 2000;Hentschel and Kothari 2001), Europe and Japan (Reichert and Shyu 2003). Empirical evidence of this type is scarce in less developed banking markets 1 .…”

Derivative activities and Asia-Pacific banks’ interest rate and exchange rate exposures

“…Forward contracts contribute minimally to risks. Reichert and Shyu (2003) extend previous studies by focusing on international dealer banks in the US, Japan and Europe to investigate how the derivative activities of these banks are associated with their market, IR and ER risks. Consistent with previous evidence, they find the use of IR options increases the IR beta for all banks, while IR and currency swaps generally reduce risk.…”

Does The Use Of Derivatives Increase Bank Efficiency? Evidence From Latin American Banks

“…Chaudhry and Reichert (1999) and Chaudhry et al (2000) find that the use of options tends to increase all types of risk, while interest rate and currency swaps significantly reduce bank risk. Lastly, Reichert and Shyu (2003) find that the use of options increases an international bank's interest-rate risk exposure.…”