Title: Financial Market Derivates And Investment Returns Of Deposit Money Banks In Nigeria
Authors: AYEWUMI, Ezonfade Fredrick, OKOLIE, Joseph Obi , Prof. ONUORAH, Anastasia Chi-Chi (F, CIFIAN)
Volume: 10
Issue: 1
Pages: 224-234
Publication Date: 2026/01/28
Abstract:
This study investigates how financial market derivatives influence the investment returns of deposit money banks in Nigeria between 2015 and 2024. Using secondary data from the audited annual reports of 15 selected banks, the research applies panel data regression models to assess the effects of gross derivative assets and liabilities (GDAL), derivative leverage ratio (DLR), interest rate derivatives (IRD), and credit risk exposure derivatives (CRED) on return on equity (ROE). The findings reveal a nuanced relationship. GDAL and CRED have a negative impact on ROE, suggesting that excessive exposure to derivatives or credit-linked instruments may erode profitability. In contrast, DLR and IRD show significant positive effects, indicating that strategic use of leverage and interest rate hedging instruments can enhance returns. These results are interpreted through the lens of key financial theories such as Modern Portfolio Theory, Arbitrage Pricing Theory, Black-Scholes-Merton option pricing, Agency Theory, Financial Intermediation Theory, and the Capital Asset Pricing Model. Together, they provide a theoretical foundation for understanding how derivative instruments affect the risk-return profile of banks. The study underscores the need for robust risk management practices and stronger regulatory frameworks to ensure derivatives are used effectively. It recommends better governance structures, targeted staff training, and greater macroeconomic stability to improve derivative performance outcomes. Overall, the research adds to the growing body of literature on financial derivatives in emerging markets. It highlights that while derivatives can boost bank profitability when used prudently, poor management or excessive risk-taking can have the opposite effect. The findings serve as a valuable guide for policymakers, bank managers, and researchers aiming to optimize derivative use in the Nigerian banking sector.