Abstract
This paper provides evidence on the impact of financial derivatives on the performance of firms in the financial sector in Ghana. Secondary data on financial derivatives, controlled business risks and business performance in terms of return on investment are used for the period 2008-2012. Data are sourced from 23 randomly selected financial firms in Accra, Ghana. A quantitative research technique is used to test four hypotheses. A strong positive correlation between financial derivatives and controlled business risks is found, r (92) = .703, p
Highlights
Many firms faced several risks in their operations
There is a strong positive correlation between financial derivatives and business performance in terms of return on investment (ROI). This means that the financial performance of businesses improves largely when they trade in financial derivatives
A unit change in financial derivatives changes the conditional mean of business performance by about 9% within a confidence interval of about 8% and 10%
Summary
As firms in financial service sector operating activities become complex, the firms in the financial service sector find themselves increasingly exposed to business risks, with the exchange and interest rate fluctuations being just some of the financial risks they face. Financial institutions and firms operating in money markets are more vulnerable to business risks relative to other firms such as service and product-centric firms (Gibson, 2007; Fadun, 2013). It is, paramount to hedge against risks to pave way for desired profitability, in order to avoid financial losses and bankruptcy. According to Cole (2009) the use of derivative instruments in corporate risk management is rapidly increasing in recent years and a situation that is caused by financial deregulations at a global scale and the evolvement of risks of higher weights in financial activities of financial firms during and after the global economic recession (Whitemann, 2003; Cole, 2009)
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