ABSTRACT

This chapter provides the background and overview of the study, the concept of banking risks, risk management and the measurement of the risk management efficiency of banks and its relationship with the use of derivatives. A significant consideration of risk management under uncertainties will be explored since derivatives are used as a hedging tool for risk and uncertainties. This chapter also introduces the differences in derivatives usage in commercial banks in the developing and developed financial market. Finance theory will be discussed to highlight the role of derivative instruments in both financial markets, and the existence of a gap in the literature will also be discussed. This chapter provides a review of efficiency theories and evidence of banking efficiency studies conducted in developing and developed countries, and the rest of the world. However, no claim is made that it covers all extant studies. This chapter also discusses the DEA theory and highlights some methodological issues in adapting this approach for the measurement of risk management efficiency. The rationale for their inclusion is provided, particularly as to why this investigation is regarded as interdisciplinary in nature.