Effect of the Use of Derivative Instruments on Accounting Risk: Evidence from Banks in Emerging and Recently Developed Countries

The purpose of this paper is to assess the level of accounting risk that banks, in both emerging and recently developed countries, face by using derivative instruments. On the whole, results show that forwards negatively affect leverage risk, the use of swap contracts has negative effect on credit risk, the use of options generally increases risk, and finally the use of futures minimally contributes to bank risk. There is some evidence that forwards and swaps are used primarily for risk-control purposes, while options tend to be used for speculative purpose. The main finding is that banks in the sample do not seem to be at risk by using derivative instruments.