Factors Influencing Banks’ Foreign Exchange Derivatives Usage

Banks are the largest users of derivative products, and examining the complex factors that influence banks' decisions to use derivatives is crucial. However, comparative analyses of the factors influencing the use of foreign exchange derivatives by banks in both developed and developing countries are lacking in the current literature. To fill this gap, a study has been conducted to examine the use of foreign exchange derivatives by banks operating in developed and developing countries. The study analyzed banking and macroeconomic data from 104 banks in 21 developed countries and 41 banks in 12 developing countries through panel data analysis for the period of 2010-2020. Due to limited data availability, the analysis period was confined to 2010-2020. The results indicate a positive relationship between interest rates and bank size with the use of foreign exchange derivatives in both developed and developing countries. In developing countries, exchange rates and loans are positively associated with foreign exchange derivative usage. However, while an increase in deposit size enhances foreign exchange derivative usage in developed countries, it reduces it in developing countries. Moreover, an increase in equity reduces foreign exchange derivative usage in developed countries, whereas an increase in the financial institutions index enhances it.