Financial Derivatives and Corporate Risk Management in Nigeria’s Volatile Macroeconomic Environment (British Journal of Advanced Research)

Summary

• The ARDL bounds test establishes a statistically significant long-run cointegrating relationship with an F-statistic of 5.42, which exceeds the upper bound critical value of 4.26 at the 1% significance level.p.24
• The short-run Error Correction Term (ECTt-1) is -0.482 (p < 0.01), indicating that 48.2% of short-run imbalances from macroeconomic shocks are corrected each quarter.p.26
• The sector-wide Return on Assets (ROA) averaged 2.14% over the sample period, ranging between a minimum of 1.05% and a maximum of 3.45%.p.22

Key insights

1. An ARDL Bounds test confirms a long-run equilibrium relationship among financial derivative instruments, macroeconomic factors, and bank Return on Assets in Nigeria.p.24
2. A 1% increase in forward contract trading volume increases long-run Return on Assets by 0.218%.p.25
3. Interest rate and currency swaps exert a statistically significant positive effect (β = 0.142) on banking sector profitability across time horizons.p.25
4. Foreign exchange options have a smaller long-run positive effect (β = 0.085), limited by high upfront premium costs and lower market liquidity.p.25
5. Exchange rate volatility severely dampens bank performance, with a long-run elasticity coefficient of -1.642.p.25
6. Capital adequacy (β = 0.098) and aggregate bank size (β = 0.165) positively support bank performance, while non-performing loans (β = -0.115) and the monetary policy rate (β = -0.038) negatively affect it.p.25
7. Short-run disequilibria adjust rapidly toward long-run equilibrium, achieving full adjustment in approximately two quarters.p.26
8. Forward contract trading volumes maintain the highest average notional log value (6.82) among derivative types on the domestic interbank market.p.22