The use of financial derivatives in risk management purposes of non-financial firms in Bosnia and Herzegovina

Rovčanin, Adnan and Hanić, Aida (2014) The use of financial derivatives in risk management purposes of non-financial firms in Bosnia and Herzegovina. In: Contemporary trends and prospects of economic recovery. CEMAFI International Association, Nice, pp. 65-77. ISBN 978-2-9544508-5-8

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Abstract

The financial system in Bosnia and Herzegovina is bank centered which follows the continental model, where banks play a leading role and in the case of BiH it means the bank participation of over 80%. The continental model assumes that banks are universal - financial supermarkets among others offer broadcasting services and sales of securities, finance and financial management. Previous research show that banks in BiH offer currency forwards, currency swaps and interest rate forwards which means that financial derivate market is organized as OTC market. Comparing to development countries, this market is not developed yet. The main reason can be found in the facts that BiH is a small country with economy in transition where non-financial firms are still not aware of the benefits in the use of these types of financial instruments and are focused on other ways of mitigating the risk. Also it is important to notice that most of the business operations are done in euro and because of the currency board regime, agency regulations on banks' net open position and a relatively small exposure to foreign currencies, except the euro, foreign exchange risk in BiH is low. Nevertheless, risk management is important for every firm so the main focus of this paper will be how BiH nonfinancial firms manage the risks that they are exposed to in terms of the use of financial derivate in their transactions.

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