The Impact of Financial Derivatives on Stability of Financial Institutions; Empirical Evidence from Financial Sector of Pakistan
Managers are risk averse therefore, mangers want to minimize the risks of the firm. So, they use the financial derivatives to hedge the risk. The question is to address either use of financial derivatives increases the stability of the financial Institution or use of financial derivatives leads to instability of the financial Institution. Z-Score measures the stability of financial institutions on using of financial derivatives. Blundell and Bond proposed GMM while using panel data. Panel data of 50 financial firms’ has been used in this study for the time period starting from 2010 to 2020. Swaps has negative impact on the financial institution stability and Forward contracts has positive impact on the financial institution stability statistically significant at 1%. Contrary, Swaps impact negatively to financial institution stability. Conclusively, forward contract is recommended to hedge risk. AR test shows no serial correlation and Hasen Test depicts the validity of the instruments.