Financial Risk Management

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Financial Risk Management using Derivatives; A case of selected financial institutions in Uganda -------------------------------------------------

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Abstract
The RAP examines the management of financial risks using derivative instruments in the selected financial institutions in Uganda. Three key research objectives were examined. These included; an examination of the institutions’ objectives for financial risk management, an examination of the determinants of derivative use by the selected commercial banks and an exploration of how commercial banks in Uganda manage various financial risks. Two (2) key financial risks were considered; interest rate risk and foreign exchange risk. To determine the objectives of financial risk management, a study tool was developed that sought respondents’ views on the major reasons for managing financial risks. To identify the determinants of derivative use among the selected commercial banks, multiple linear regression was used. The volume of derivatives used by the selected banks was considered as a dependent variable and regressed with Bank profitability, Interest Rate Risk Exposure, Bank leverage position, Bank investment growth and Bank size. The variables tested in the linear regression model were based on the determinants presented in several literature reviews as key rationales for corporate use of derivative instruments.

Average derivative volume was 0.31; average bank profitability was 0.34; average interest rate risk exposure was 0.14 average leverage was 0.43; average investment growth of the sampled commercial banks was 0.38 and the average bank size was approximately UGX. 245Billion. The higher the volume of derivatives used, the lower the bank interest rate risk exposure. The higher the banks’ leverage position, the higher the amount of derivatives used. Banks with substantial investment opportunities were also likely to be more motivated to use derivatives than those with less investment opportunities and huge banks with large asset bases were also likely to use more derivatives

Table of contents
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| Abstract | 2|
| Table of contents | 3|
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| Part 1| |
| Introduction | |
1.1| Introduction and background | 4|
1.2| Derivatives | 4|
1.3| The financial services industry in Uganda | 5|
1.4| Why a topic on financial derivative usage | 6|
1.5| Research objectives | 7|
1.6| Research approach | 7|
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| Part 2| |
| Methodology & data collection | |
2.1| Information: sources and limitation | 8|
2.2| Ethics I data collection | 9|
2.3| Research variables | 9|
2.4| Empirical model | 10|
2.5| Research hypotheses | 10|
2.6| Information analysis | 13|
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| Part 3| |
| Research results | |
3.1| Descriptive statistics | 14|
3.2| Examination of objectives of financial risk management | 16| 3.3| Multivariate analysis | 19|
3.4| How commercial banks manage various financial risks | 25| 3.4.1| Managing currency or foreign exchange risks| 25|
3.4.2| Managing interest rate risk in the selected commercial banks| 29| 3.5| Conclusion | 30|
3.6| Recommendations | 31|
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| Abstract | 2|
| Table of contents | 3|
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Part 1
Introduction

1.1 Introduction and background
Derivatives, for example, futures, options and swaps, are off-balance sheet instruments that allow banks to transform the duration of their balance sheets in order to manage market risk without...
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