ABSTRACT
This study examined the Financial Instruments and Performance of Listed Commercial Banks in Nigeria. The study employed ex post facto research design. Data for analyses is got from the published financial reports of 8 listed deposit money banks for a period of 7 years (2014 to 2020). The pooled multiple regression method using ordinary least square regression (OLS) technique was used to analyze the data generated with the aid of Statistical Package for the Social Sciences (SPSS Version 21). Findings from the study revealed that forwards, futures and swaps assets and liability have no significant effect on return on assets and return on equity of the listed deposit money banks in Nigeria. Further findings revealed that Forward, future and swap assets has a positive significant effect on earnings per share of the listed deposit money banks in Nigeria. Furthermore, it was observed that Forwards, Futures and Swaps assets has a positive insignificant effect on liquidity of the listed deposit money banks in Nigeria and finally, it was revealed that Forward, future and swap assets and liability has a negative insignificant effect on leverage of the listed deposit money banks in Nigeria. Based on the findings, the study recommends amongst others that financial instrument accounting and valuation procedures be established and embraced to demystify Nigeria’s derivative market. This would enable the users of financial information analytics to understand each and every hedging practice’ advantages and disadvantages as currently most deposit money banks do not have a steady policy on derivative utilization; and financial risks management is merely left on the whims and devices of managers and thus making investors incur agency costs.
TABLE OF CONTENTS
Title page i
Declaration ii
Dedication iii
Certification iv
Acknowledgements v
Table of contents vi
Abstract ix
CHAPTER
1: INTRODUCTION
1.1
Background
to the Study 1
1.2 Statement of the
Problem 3
1.3 Objectives of the
Study 5
1.4
Research Questions 5
1.5
Research Hypotheses 6
1.6. Significance of the Study 7
1.7. Scope of the Study 8
1.8 Operational
Definition of Terms 8
CHAPTER 2: REVIEW OF RELATED LITERATURE
2.1 Conceptual Review 11
2.1.1 Concept of financial instrument 11
2.1.2 Risk associated
with financial instrument 14
2.1.3 Derivatives as a financial instrument 15
2.1.3.2 Current developments in the use
of financial derivative in Nigeria 19
2.1.4 Derivative swaps financial instrument 21
2.1.4.1 Swaps and risk exposures 22
2.1.4.2 Hedging risks with swaps 24
2.1.4.3 Measuring swaps hedging effectiveness 26
2.1.5 Derivative options financial instrument 28
2.1.5.1 Puts and calls, in option transaction. 29
2.1.5.2 Risks of buying and selling options: 31
2.1.5.3 Hedging risks with options 32
2.1.5.4 Option cost premium 33
2.1.5.5 Timeframe 33
2.1.6 Financial performance: a subset of performance 34
2.1.7 Financial instrument in contemporary digital economy 37
2.1.7.1 Blockchain technology: A brief introduction 37
2.1.7.2 The forward and futures contracts 39
2.1.7.3 The Commodity spot price and futures price 42
2.1.7.4 Special considerations: spot price, futures price,
and basis 44
2.1.7.5 The decentralized finance 44
2.2 Theoretical Review 46
2.2.1 The Modern portfolio theory of investment 46
2.2.2 Agency theory 47
2.2.3 Information
signalling theory 47
2.3 Empirical Review 47
2.4 Summary of literature Review 62
2.5
Gap in Literature 67
CHAPTER 3: METHODOLOGY
3.1
Research Design 68
3.2 Population of the study 68
3.3 Sample and Sample Size
Determination 68
3.4 Method of Data Collection and
Data Sources 69
3.5 Data Analysis
Technique 69
3.6 Definition of
Variables 70
3.6.1 Independent
variables 70
3.6.2 Dependent variable 70
3.7
Model
Specification 71
CHAPTER
4: DATA PRESENTATION AND ANALYSIS
4.1 Data Presentation 73
4.2 Data Analysis 73
4.2.1 Data validity test 73
4.2.2 Descriptive
statistics 74
4.2.3
Correlation analysis 76
4.2.4 Regression of the
estimated model summary 77
4.3 Discussion and Interpretation of Results 87
CHAPTER
5: SUMMARY, CONCLUSION AND RECOMMENDATION
5.1
Summary
of Findings 90
5.2 Conclusions 91
5.3 Recommendations 93
5.4 Contribution to
Knowledge 94
5.5 Area of Further
Research 94
Reference 96
Appendices 103
LIST OF TABLES
Page
4.1 Source: SPSS Output V.21 in appendix ii 74
4.2 Source: SPSS Output V.21
in appendix ii 76
4.3 Source: SPSS Output V.21 in appendix ii 77
4.4 Source: SPSS Output V.21 in appendix ii 78
4.5 Source: SPSS Output V.21 in appendix ii 79
4.6 Source: SPSS Output V.21
in appendix ii 80
4.7 Source: SPSS Output V.21 in appendix ii 81
4.8 Source: SPSS Output V.21
in appendix ii 82
4.9 Source: SPSS Output V.21 in appendix ii 83
4.10 Source: SPSS Output V.21
in appendix ii 84
4.11 Source: SPSS Output V.21 in appendix ii 85
4.12 Source: SPSS Output V.21
in appendix ii 86
CHAPTER 1
INTRODUCTION
1.1
BACKGROUND TO THE STUDY
The goal of an investment choice is to get required price of
return with minimal threat (Gibson, 2007). To reap this aspiration, a range of
financial instruments, strategies and techniques have been devised and developed
in current time (Tijani & Mathias, 2013). With the opening of boundaries
for global trade and business, the world exchange received momentum in the
ultimate decade. The integration and incorporation of capital markets
world-wide has given upward push to improved economic risk with the customary
adjustments in the interest rates, foreign money trade fee and inventory
expenditures (Wayne & Kothari, 2012). To overcome the threat springing up
out of these fluctuating variables and improved dependence of capital markets
of one set of international locations to the others, threat management
practices have also been reshaped with the aid of inventing such financial
instruments so as to mitigate the danger element that comes with uncertainty of
doing enterprise globally. These hedge instruments are known as economic
devices which now not only minimize monetary danger however additionally open
new possibility for excessive threat takers to mission into exchange besides
borders (Nwaorgu & Iormbagah, 2018).
Innovations in the
contemporary monetary market have mostly been primarily based on the concept of
derivatives instruments. What started out as a simple notion in historical
times which came to be later developed into fashionable contracts for the
duration of the Chicago Board of Trade generation has now become a maze of
complex monetary devices and contracts. The asset orders on which the monetary instruments
had been primarily based have gone through a speedy expansion. Nowadays, there
is a financial instrument for exceptionally a great deal alternate contract
(Steve, 2012).
There are economic
instrument for stocks, commodities, actual property etc. We even have financial
instrument that are primarily based on different derivatives; developing a Meta
shape of sorts. The purpose behind this speedy growth is that these monetary instruments
meet the exigency of a large variety of people and organizations worldwide.
After the 2008 world economic crisis, financial instrument had to take the fall
for the complete chain of events. They had been vilified with the aid of the
media in general. That has come as rather of a setback. Barring that the upward
push of financial instrument for risk buying and selling in current years has
been nothing short of outstanding and this is predicted to proceed in the
future (Gibson, 2007).
Financial instruments
have been of specific interest to the accounting enterprise in current years,
particularly the International Accounting Standards Board (IASB). Financial
statement users, such as investors, preparers, and auditors, have consistently
had difficulties with accounting for financial instruments, specifically complicated
derivatives which information about it has extended dramatically in current
years (Shea &; Gary, 2015). The standard for reporting financial instrument
can be vast and puzzling to many users. It is additionally tremendously
challenging to measure the fair cost of financial instruments and to decide
when cognizance of impairment losses is appropriate. The impact of financial
instruments on the 2008 monetary disaster in addition highlighted that the
current accounting requirements for financial instruments are insufficient for
today’s complex monetary environment (Hon, 2012).
Gibson (2007) asserted that the common conventional precept
of commercial enterprise successes and making excessive corporate profits as a
main tenant for commercial enterprise existence has been revolutionized into
that of wealth maximization by corporate managers as a result company managers
are exploring approaches to mitigate the hazard related with the ever altering
commercial enterprise environment thereby using financial instruments. As
mentioned in Kolapo and Ayeni (2012), the precept behind income making is not
wrong, however in today’s cutting-edge world commercial enterprise dominated by
international and multinational firms, financial instrument have been use for
corporate positive factors and losses. These financial instruments are
complicated in nature; they are in the shape of contracts, frequently used as
tools for strategic danger management activities by using a variety of
businesses and sophisticated investor (Nystedt, 2004).
According to Pelen (2016), swaps and options as financial
instruments have mushroomed and surged very rapidly from easy monetary futures
to a large range of distinctive and complex securities around the world.
Financial markets can facilitate the administration of financial threat
exposure, seeing that they allow investors to unbundle and transfer economic
risk. In principle, such markets ought to make contributions to a greater
efficient allocation of capital and cross-border capital flow, create extra
opportunities for diversification of portfolios, and facilitate risk transfer,
fee discovery, and greater public statistics (Patnaik 2009; Nystedt 2004). This
is the bedrock for assessing the function financial instrument has performed in
altering the dynamics of danger mitigation in a global enterprise phenomenon.
1.2 STATEMENT OF THE PROBLEM
Accounting for financial instrument has created reservations
and skepticism for preparers, and customers of financial statements as there
are certain imprecisions differing from measurement to disclosure which is an
issue for concern (Nwaorgu &; Iormbagah, 2018). In the last few years,
organizations in the rising market have expanded the use of financial
instruments to hedge towards market threat which is as a result of market
uncertainties such as interest rate fluctuations and overseas exchange
fluctuations which has triggered many corporations to operate adversely.
Even though statistics on firm economic instrument usages is
extensively accessible in the developed world, the empirical lookup concerning
the use of futures, forwards and swaps is nonetheless problem of debate
especially in emerging economies as solely few sectors that are listed in
Nigeria, document the use of these financial instruments (Olawale, 2015).
Financial establishments derive some advantages from engaging in transactions
that entails buying and selling on financial derivatives such as swaps,
options, forwards and futures. These transactions, aside from appropriating income
for the corporations are additionally main risk management techniques used by
the company to hedge towards incalculable commercial enterprise situations
(Hon, 2012).
Most of the empirical works on financial instrument and
their impact on firm’s overall performance shows off some methodological borderline.
One of the foremost obstacles is that most research use the notional quantity
of derivatives as just financial instrument but inferentially, financial
instruments are broken down into swaps, options forwards and futures which are
all exemplified into derivatives but need to be looked at discretely. Also, a
company can also have a greater notional spinoff quantity which does not
necessarily mean a greater risk exposure. For instance, a company may
additionally have a high notional price of derivatives, but can also be
proactive enough to fit its derivatives positions with different positions in
the spot market or with the contrary positions in the derivatives market using
swaps, options or forward contracts; as such, the various financial instruments
and how they have an effect on overall performance of corporations need to be
looked at separately. Studies such as Chaudhry (2010) used options as economic
instrument and discovered that options have a non-significant advantageous
effect on bank risk, While in Nigeria the research of Adebisi, and Oladunjoye
(2013) additionally looked at financial instrument in the perspective of whole
derivatives and observed out that there exist an inverse relationship between
performances of firms and the use of financial instruments. As such, there
appear to be complexity in preceding findings of authors.
In the light of the foregoing, the study seeks to check out
the effect of financial instruments on the performance of listed commercial
banks in Nigerian with an adapted methodology to see if outcomes now conform to
that of preceding studies.
1.3 OBJECTIVES OF
THE STUDY
The main objective of this study is to examine the effect of financial
instrument on performance of listed commercial banks in Nigerian. However, the specific objectives of the study are to:
i.
Examine the effect of Futures, Forwards, and Swaps assets and liability on return
on asset of listed firms in Nigeria
ii.
Examine
the effect of Futures, Forwards, and Swaps assets and liability on return on
equity of listed firms in Nigeria
iii.
Ascertain the effect of Futures, Forwards, and Swaps assets and liability on
earnings per share of listed firms in Nigeria
iv.
Determine the effect of Futures, Forwards, and Swaps assets and liability on
liquidity of listed firms in Nigeria
v.
Study
the effect of Futures, Forwards, and Swaps assets and liability on the leverage
of listed firms in Nigeria
1.6 RESEARCH QUESTIONS
The following research
questions are set to be answered during the course of the study;
i.
To what extent does Futures, Forwards, and Swaps assets and liability affect the return on
asset of listed firms in Nigerian?
ii.
How does Futures,
Forwards, and Swaps assets and liability affect return on equity
of listed firms in Nigerian?
iii.
To what extent does Futures, Forwards, and Swaps assets and liability affect the earnings per
share of listed firms in Nigerian?
iv.
How does Futures,
Forwards, and Swaps assets and liability affect the liquidity of
listed firms in Nigerian?
v.
How does Futures,
Forwards, and Swaps assets and liability affect the leverage of
listed firms in Nigerian?
1.7 RESEARCH HYPOTHESES
The following research null hypotheses are set to be tested
during the course of the study;
Ho1: Futures, Forwards, and Swaps assets and liability has no
significant effect on return on asset of listed firms in Nigeria
Ho2: Futures, Forwards, and Swaps assets and liability has no
significant effect on return on equity of listed firms in Nigeria
Ho3: Futures, Forwards, and Swaps assets and liability has no
significant effect on earnings per share of listed firms in Nigeria
Ho4: Futures, Forwards, and Swaps assets and liability has no
significant effect on liquidity of listed firms in Nigeria
Ho5: Futures, Forwards, and Swaps assets and liability has no
significant effect on leverage of listed firms in Nigeria
1.6. SIGNIFICANCE
OF THE STUDY
This study is
going to be of huge importance
to managements, corporations,
Investors, Government and academics.
Management: Management
of corporations shall be made to know the theories that
under pins accounting for financial instrument and the
way it affects the performance of corporations. It will conjointly enhance
the data of the management team within
the facet of the utilization of accounting for hedge and
speculative functions which will enhance the firms’ prospective
wealth maximization objective.
Investors: Existing investors are however,
made to grasp how effective the employment of
monetary instrument is in hedging against market
risk such they'll support the policies of
management that's tailored towards the employment of financial instrument and
the way efficient they're been accounted for.
Government: The
government will be made to know the importance of contributing to smooth market
operation to mitigate the various market risks that will affect the use of
financial instrument via sound policy creation.
Academics: Scholars will find this study’s findings to be significant
as it will provide an up to date and top notch information on how the
commercial bank’s financial performance is affected by the use of financial
derivatives. Fellow researchers will also find this study’s findings to be of
significance as they will rely on it for further proof and knowledge on how the
commercial bank’s financial performance is affected by the use of financial derivatives
1.7. SCOPE OF THE STUDY
This study is constrained to the listed firms in Nigerian.
But it particularly viewed the listed deposit money banks as it is ascertained
by Adebisi, &; Oladunjoye, (2013) as the only sector that comprehensively
divulge records on the various financial instruments. The timeframe for this
study covers a duration of 7 years (2014-2020). The purpose for limiting the
study to the listed deposit money banks is as a result of their high adherence
to financial reporting regulatory framework. As a sector they are the only
corporations that have entirely adopted and complied with International
Financial Reporting Standard (IFRS) as stipulated via the Financial Reporting
Council of Nigeria. Finally, the preference of time is constrained so as to
seize the length within the timeframe IFRS 9 was issued and adopted by the
listed commercial banks that pertains to financial instrument which is
groundwork of this study.
1.8 OPERATIONAL DEFINITION OF TERMS
Financial instrument: International Accounting Standards (IAS 32 and 39) outline
a financial instrument as "any contract that gives rise to a financial
asset of one entity and a monetary legal responsibility or equity instrument of
another entity".
Swaps: This
represents a bilateral settlement between individuals or entities to trade cash
flows (payments) over a detailed duration and rate; it can also contain an
intermediary or a ‘swap bank’ that brings collectively the counterparties for a
premium.
Options:
Serving as a by-product security, an option represents a contractual settlement
which offers the buyer (holder) the right, however not the obligation, to
purchase or sell a targeted volume of a specified asset within a distinctive
time period.
Profit after tax: As a Performance measurement tool, this variable represents
the complete quantity that a commercial enterprise earns after all tax
deductions have taken place. It is used as an indicator to decide how a whole
lot a commercial enterprise truly earns and how much it can make use of for its
day to day activities. Profit after tax is additionally considered as a measure
of a company’s profitability after all its costs have been deducted and can be
utterly utilized by the organization to conduct its business. Shareholders are
additionally paid dividends from this amount.
Earnings per share: This variable is used to measure the market value of an
entity. It is typically derived from the net earnings after the income
statement has been prepared. Earnings
per share can be calculated by way of dividing the net profit or loss of the
duration attributable to shareholders by the weighted average number of
ordinary shares outstanding. In this study it will be derived via taking the
figures of the corporations reported earnings per share in their financial
statement that represents the share of total income to total outstanding shares
of the firm at a time.
Liquidity: Liquidity
refers to the availability of cash or cash equivalents to meet temporary
operating needs. In other words, liquidity is the amount of liquid assets that
are accessible to pay expenses and debts as they become due. Obviously, the
most liquid property of all is cash. Creditors and investors frequently use
liquidity ratios to gauge how well a commercial enterprise is performing. Since
lenders are particularly concerned with a company’s capability to repay its
debts, they prefer to see if there is sufficient money and equivalents on hand
to meet the contemporary parts of debt.
Derivatives:
Derivative as it is used in this research is a contract between two or more
parties whose price is based totally on an agreed-upon underlying monetary
asset (like a security) or set of assets (stock or digital assets).
Return on assets: ROA is a measurement of how worthwhile a commercial
enterprise is in contrast to its assets. The researcher in this context used it
as a ratio that helps us to understand what the business enterprise is doing
with the assets they have available to them. Are they managing their belongings
wisely? For computation sake, the figures for the return on asset had been
gotten by means of dividing the Net Income with the total asset.
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