Derivatives utilization and financial risk management under deregulation and uncertainty

Abstract EN

Given the importance of derivatives in the world of finance and businesses, this study surveys the utilization of derivatives and risk management practices within the Jordanian environment.

The study examines the primary utilization of derivatives, objectives and instruments, in addition to the hedging techniques utilized by firms.

Furthermore, this study examines the control and reporting procedures followed by firms, in which special focus is given to the availability of derivative strategies, policies, reporting and control issues.

Yet, this study surveyed a wide cross-section of listed financial and non-financial firms across the Jordanian market, in which it reports the results of a questionnaire of derivative utilization and financial risk management practices.

Of the overall responses, the results showed that, 88.10 % of firms report that they use derivatives, while 11.9 % indicated that they do not due to some reasons firms put forward for not using derivatives.

The results indicated that the percentages of responding firms are higher for the financial firms in the larger size groups and higher for the non-financial firms with the smaller size groups.

For the middle two size groups, the percentages of responding firms are close for both groups.

Regarding the objectives issue, the results revealed that the overall sample employs derivative for hedging purposes (40.47 %), while 23.8 % utilize derivatives for both hedging and investment purposes.

Next came the percentage of (9.52 %) for hedging and speculation purposes.

The results showed variations among firms toward the derivative instruments utilized, the hedging technique used, the concerns toward derivatives, and the derivative software employed.

In accordance to the control and reporting issue, the results concluded that under most cases where derivatives were used for activities other than hedging, it has become common for most firms to develop and apply documented policies and strategies.

Disturbances among firms are concluded, particularly those related to the existence of a specialized committee responsible for risk management, the frequency that derivatives transactions are reported to the top management or board of directors, and the frequency of derivative portfolio valuation.