Size and currency derivatives usage by multilateral banks

Abstract

Purpose

The purpose of this paper is to investigate the extent to which the size of multilateral banks (MBs) influences their usage of currency derivatives to manage currency risk. It provides an empirical assessment of whether economies of scale and scope found in other studies apply to MBs.

Design/methodology/approach

A quantitative hypothesis regarding the relationship of the size of MBs to their usage of currency derivatives was tested using regression, correlation and analysis of variance.

Findings

The results show that there is a significant positive relationship between size (as measured by total assets) of MBs and the total principal amounts of currency derivatives used. These results suggest that MBs are enjoying economies of scale and scope in using currency derivatives in managing currency risk.

Research limitations/implications

The data used were obtained from annual reports that may not fully provide relevant information that could influence the usage and size of currency derivatives. Future studies may therefore use surveys to obtain data to conduct multivariate regression analysis to provide further insights on other determinants of currency derivatives usage.

Originality/value

The study is of value to those interested in multilateral banking. It breaks new ground by using non-survey method for the first time in investigating the relationship between size and currency derivatives used by MBs. The results are also useful for financial institutions selling currency derivative products to MBs in identifying which to target. For managers of small MBs it may be cost effective for them to use internal hedging techniques as economies of scale applies in currency derivative markets. The results of the study are also useful to policy and regulation of MBs.

Citation

Kamau, P., L. Inanga, E. and Rwegasira, K. (2014), "Size and currency derivatives usage by multilateral banks", Journal of Advances in Management Research, Vol. 11 No. 3, pp. 257-272. https://doi.org/10.1108/JAMR-10-2013-0061