Risk Management Strategies in Banking: A Study of Derivatives Use by Commercial Banks

Abstract

This study explores the risk management strategies employed by commercial banks, focusing on their utilization of financial derivatives. In the wake of financial crises that have exposed vulnerabilities in the banking sector, effective risk management has become paramount. The research delves into the types of risks faced by banks, including credit, market, and operational risks, and highlights the role of derivatives—such as options, futures, and swaps—as essential tools for mitigating these risks. Additionally, the study examines the regulatory framework governing derivatives trading, particularly the Basel III guidelines, which aim to enhance transparency and ensure adequate capital buffers. Through analysing various case studies, the research underscores the effectiveness of derivatives in managing risk while addressing the complexities and challenges associated with their use. Ultimately, this study contributes to the existing literature by providing valuable insights into best practices and strategies that can help commercial banks navigate the evolving financial landscape while maintaining compliance with regulatory requirements.