Banks increasing exposure to interest rate shocks through derivatives speculation.
Banks trade interest rate derivatives for different reasons. Some use swaps to balance their financial risks, while others take risks by speculating in derivatives. This study analyzed banks' derivative portfolios and non-derivative exposure to interest rate risk. The researchers compared risk levels with and without derivatives using a term structure model. The findings show that some banks use derivatives to manage their balance sheet risks, while others increase their exposure to interest rate shocks through speculative trading.