THE RELATIONSHIP BETWEEN OPTIONS DERIVATIVES AND FINANCIAL PERFORMANCE OF SELECTED LISTED COMMERCIAL BANKS IN KENYA

Abstract

Purpose: The purpose of the study was to ascertain the relationship between options derivatives and financial performance of selected listed commercial banks in Kenya.

Methodology: Descriptive research design was used when collecting data using closed ended questionnaires from the selected 11 listed commercial banks in Kenya. The target population included 156 respondents who were 25 risk managers, 53 operations managers, 33 credit managers and 45 marketing managers to participate in the study. The study selected all of the 156 respondents through census sampling technique. Pre-test questionnaires was sent to six respondents who were junior officers in risk, credit, operations and marketing departments of non-listed commercial banks in Meru Kenya. The collected data was then coded and analyzed quantitatively using the descriptive statistics such as mean, percentage and standard deviation while inferential statisticsperson correlation analysis were used. Linear regression models were also used. Further on, the tables, graphs were used when indicating the analysis results.

Results: Options had a statistically significant relationship with financial performance. Most respondents agreed that there were clear procedures used to solve options price discrepancies. It had a mean of 4.79 and standard deviation of 0.62. However, most respondents disagreed that options derivatives market activities were improving in the banks. It had a mean of 3.85 and standard deviation of 1.05. The results further indicated that options had an R value of .793^a and Durbin Watson value of 1.292 showing there was a strong correlation between the two variables, while the R-square was 0.629. This implied that options as a paradigm predicted 62.9% of financial performance variable in this study.Options also had a significant p-value of 0.018.

Unique contribution to theory, policy and practice: The results indicated that commercial banks were really incurring more costs as compared to profits generated due to errors made by the employees when engaging in various options derivatives markets. In addition, when financial derivatives owners were given the rights and not forced to purchase or vend an underlying asset at a strike price or exercise price, at or earlier than the expiry date of the options, there was an above average purchase. The study recommends that the bank staff should explain full information on the options derivatives so that when a client is making the purchase, they are well knowledgeable. This knowledge should begin from the procedures followed when making a purchase, sale or transfer of option derivatives in the securities exchange market. In addition, any costs associated with the options derivatives should be fully communicated to clients priorly to avoid premature termination of options derivatives contracts. Further on, there should be more training on banks staffs by the bank management so that they are equipped with knowledge on the specifics of options derivatives trading. By doing so, the chances of errors would be minimized.