The Role of Financial Innovation and the Derivatives Market in the World and Turkey in the Context of the Global Crisis of 2008

The Role of Financial Innovation and the Derivatives Market in the World and Turkey in the Context of the Global Crisis of 2008

Nizamülmülk Güneş (Savings Deposit Insurance Fund, Turkey)
DOI: 10.4018/978-1-5225-2245-4.ch014
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In Derivatives markets, contracts made concerning an asset or a financial instrument between a buyer and a seller entered into today regarding a transaction to be fulfilled at a future point in time. The derivatives markets incorporate forward, swap, futures and options transactions. Banks, the principle actor in financial markets, finds derivatives favorable in developing countries like Turkey in which there is high interest rates and inflation. It is crucial to express the role of the derivatives markets, whereas the uncertainty concerns are perceived enormously. 2008 mortgage crises, the main cause is stated as to sheer of expectations, which started in US and spread out to all developed and developing countries evoke to encounter against risks intensely. The aim of this paper is to study how efficient is the use of the derivatives market instruments in Turkey, a developing country, by the banks and other financial market actors after the 2008 Global Crises.
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Literature Review

Some of the studies, which came to the fore in the literature review carried out with regard to the subject matter, are briefly mentioned below.

Carter and Sinkey (1998) studied the factors affecting the decision of USA commercial banks with size of assets between 100 million $ and 1 billion $ to use interest rate derivatives and utilization volume. Carter and Sinkey determined in this study that interest rate-based derivatives use is positively related to the interest rate risk, that banks with a more sturdy capital structure use interest rate swaps more, that there is a positive relationship between bank size and the decision to enter into interest rate derivatives transactions, but that the size of the bank has no impact on the utilization intensity of interest rate derivatives.

Hundman (1998) studied the factors affecting the utilization of derivatives by USA commercial banks with a size of assets of more than 500 million $ and determined that large banks, banks with a lower interest rate risk exposure, banks with a higher credit risk exposure and banks with a higher capital/assets rate use derivatives more. It was determined that there was no relationship between bank profitability and derivatives use.

Simons (1995) studied the factors affecting the interest rate derivatives use of USA banks and he determined in this study that; (1) there is no significant relationship between the “gap” criterion which is used in determining interest rate risk and the interest rate-based derivatives use, (2) there is a negative relationship between bank size and derivatives use, (3) banks with a sturdy capital use interest rate swaps more and (4) banks with a bad assets quality use swaps and futures contracts more.

Sinkey and Carter (2000) determined in their research, in which they studied the financial characteristics of USA banks which use derivatives and which don't use derivatives, that the capital structures of the banks which don't use derivatives are sturdier and their credit portfolios are of better quality and they are less exposed to interest rate risk. In addition, they determined that there is a positive relationship between bank size and derivatives use and pointed out that this finding reinforces the opinion that economies of scale and scope are in use in derivatives markets.

Key Terms in this Chapter

FoRWaRd: It represents the alteration of foreign exchange and currency units in the future in accordance with the rates and parities determined today.

Swap: It is the barter contract that is made by the parties by means of changing the interest or the type of currency.

Financial Innovation: It represents the changes and developments, which affect financial markets.

Option: They are the contracts that give the right to buy or sell a specific asset for a specific price, in a specific quantity, on a specific maturity date or until a specific maturity date.

Derivatives: Financial products, of which prices are determined in accordance with some other assets, are called derivatives.

Futures: They are the contracts including the delivery or receipt of a specific spot product, of which price is determined today.

2008 Global Crisis: It is the economic progress that emerged in the last months of 2008 and negatively affected many countries.

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