Risk Management in Banks through Hedging
Banking as a financial intermediary sector, faces numerous risks in the form of accounts converting to Non Performing Assets (NPAs) and also the risks which are uncontrollable like foreign exchange risk, interest rate risk etc. For this, the transit towards risk management practices in every sphere has become imperative in the present scenario. Indian Banks especially public sector banks have long used risk management activities such as duration and gap analysis where these banks manipulate their interest rates to manage their Asset-Liability mismatch. However, these activities are best suited for short term plans, for long term banks need to adopt another risk management activity where they can capitalize on more unexpected risk structures. Risk management through derivative securities has been another avenue for banks to refine risk management practices. Similar to other International markets, price and interest rate volatility in Indian financial markets is also high; hence the implications of not hedging the bank portfolio may prove to be disastrous. Derivatives give banks an opportunity to manage their risk exposure and to generate revenue. The research objectives framed to reiterate the importance of risk management practices through derivatives are to examine the derivative exposures in banks and to determine the influence of derivative exposure on bank’s intermediation role.
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