Transformations  in
Business & Economics

DERIVATIVES AND THE RISK RESPONSE OF FINANCIAL ENTERPRISES: RISK HEDGING OR SPECULATION ARBITRAGE?
Xuanling Ma, Meng Ji

ABSTRACT: Financial enterprises are risk-vulnerable in derivatives trading due to risk hedging and speculation arbitrage. Current research on financial enterprises’ risk response using derivatives mostly focuses on macro-influencing factors, overlooking the influence mechanism of derivatives trading on financial enterprises’ risk response from the micro perspective. However, said mechanism greatly influences the internal management and external supervision of financial enterprises. The influence mechanism of derivatives trading on financial enterprises’ risk response given different purposes was explored in this study. The relationship between derivatives and financial enterprises’ risk response was empirically investigated using data from Chinese listed financial companies from years 2009 to 2021 following the Modigliani and Miller Theories of Capital Structure, and both currency derivatives and interest rate derivatives’ influence on financial enterprises’ risk response were further analysed. Results show that derivatives trading of financial enterprises improves their risk response level, while both high policy uncertainty and state-owned attributes weaken the positive correlation between financial enterprises’ risk response and derivatives, which strengthens during an economic downturn. Derivatives enhance enterprise risk response by relaxing credit standards and reducing liquidity creation level. Financial enterprises were also found to trade derivatives for speculation arbitrage instead of risk hedging, thus enriching risk response research and improving the implementation and supervision of derivatives.

KEYWORDS:  derivatives, risk response of financial enterprises, risk hedging, speculation arbitrage.

JEL classification:  G21, G23, G32, D81, D84.