Public Sector Accounting and Budgeting

Public Sector Accounting and Budgeting

Risk management using derivative instruments: A review of public and private sector literature

Document Type : Review Article

Author
ph.D, student, Accounting Department, Faculty of Management and Accounting, Allameh Tabataba'i University, Tehran, Iran
10.22034/psab.2026.234631
Abstract
Increasing volatility in exchange rates, interest rates, and asset prices has exposed organizations in both the public and private sectors to a wide range of financial risks, leading to growing attention to derivative instruments as key risk management tools. This study adopts a systematic review approach to examine the existing literature on the use of financial derivatives for risk management in the public and private sectors, with the aim of identifying institutional, regulatory, and motivational similarities and differences. Studies published between 1990 and 2025 were collected from major academic databases; out of 198 identified articles, 47 studies were ultimately selected for final analysis based on the PRISMA framework. The findings indicate that although the use of derivatives for risk hedging is widespread, there are significant differences between the two sectors in terms of usage objectives, levels of disclosure transparency, and accounting frameworks. Identified research gaps include the integration of sustainability metrics, the role of crypto-derivatives in emerging markets, and the application of machine learning techniques in derivative risk assessment. Effective use of derivatives requires transparent regulatory frameworks, strong financial governance, and adequate technical capacity.
Keywords

Subjects


رضوانی، اکبر؛ تبریزیان، بیتا؛ نیکومرام، هاشم؛ رهنمای رودپشتی، فریدون. (1403). مدل‌سازی نقش مدیریت ریسک مالی در ابزارهای مشتقه مالی با رویکرد راهبردی CATWOE. نشریه دانش مالی تحلیل اوراق بهادار، 17(64)، 18-39.
Adam, T. (2002). Do Firms Use Derivatives to Reduce Their Dependence on External Capital Markets? European Finance Review, 6, 163-187.
Adkins, L., Carter, D., & Simpson, W. (2006). Managerial incentives and the use of foreign exchange derivatives by banks. The Journal of Financial Research, 30(3), 399–413.
Afza, T., & Alam, A. (2011). Corporate derivatives and foreign exchange risk management: A case study of non-financial firms of Pakistan. Journal of Risk Finance, 12(5), 409–420.
Ameer, R. (2010). Determinants of corporate hedging practices in Malaysia. International Business Research, 3(2), 120–130.
Arrow, K. J. (1965). Insurance, risk, and resource allocation. In K. J. Arrow, Aspects of the theory of risk bearing (pp. 143–211). Helsinki: Yrjö Jahnsson Lectures.
Bartram, S. M. (2000). Corporate risk management as a lever for shareholder value creation. Financial Markets, Institutions & Instruments, 9(5), 279–324.
Bodnar, G., & Gebhardt, G. (1998). Derivative usage in risk management by U.S. and German non-financial firms: A comparative survey. Journal of International Financial Management & Accounting, 10(3), 153–187.
Brewer, E. J., Jackson, W. E., & Moser, J. T. (2001). The value of using interest rate derivatives to manage risk at U.S. banking organizations. Economic Perspectives, 25(3), 49–55.
Brockett, P. L., Wang, M., & Yang, C. (2003). Pricing weather derivatives using the indifference pricing approach. Working Paper, University of Texas at Austin.
Chernenko, S., & Faulkender, M. (2008). The two sides of derivatives usage: Hedging and speculating with interest rate swaps. Journal of Financial and Quantitative Analysis, 46(6), 1727–1754.
Froot, K., & Stein, J. (1998). Risk management, capital budgeting, and capital structure policy for financial institutions: An integrated approach. Journal of Financial Economics, 47, 55–82.
Gamba, A., & Triantis, A. (2014). Corporate risk management: Integrating liquidity, hedging, and operating policies. Management Science, 60(4), 203–235.
Gay, G., & Nam, J. (1999). The underinvestment problem and corporate derivatives use. Financial Management, 27(4), 53–69.
Geczy, C., Minton, B. A., & Schrand, C. (1997). Why firms use currency derivatives. The Journal of Finance, 52(4), 1323–1354.
Gorton, G., & Rosen, R. J. (1995). Corporate control, portfolio choice, and the decline of banking. Working Paper, University of Pennsylvania.
Hao, X., Sun, Q., & Xie, F. (2022). International evidence for the substitution effect of FX derivatives usage on bank capital buffer. Research in International Business and Finance, 62, 101687.
Hon, T.-Y. (2012). The behavior of small investors in the Hong Kong derivatives markets: A factor analysis. Journal of Risk & Financial Management, 5, 59–77.
Hull, J. C. (2018). Options, futures, and other derivatives (10th ed.). Pearson Education.
Kim, S., & Yang, D. (2020). Derivative usage and risk management in emerging Asian markets. Asia-Pacific Financial Markets, 27(4), 583–604. https://doi.org/10.1007/s10690-020-09303-9
Lai, S., Qiu, J., Tao, Y., & Liu, Y. (2022). Risk hedging strategies for electricity retailers using insurance and strangle weather derivatives. International Journal of Electrical Power & Energy Systems, 134, 107372.
Lee, J., & Kim, S. (2023). ESG integration in derivative-based risk management: Evidence from Asian markets. Journal of Sustainable Finance & Investment, 13(2), 225–243. https://doi.org/10.1080/20430795.2022.2039876
Luby, M. J. (2012). The impact of interest rate swaps on state and local governments. Public Budgeting & Finance, 32(3), 67–90. https://doi.org/10.1111/j.1540-5850.2012.01018.x
Kanamura, T., Homann, L., & Prokopczuk, M. (2021). Pricing analysis of wind power derivatives for renewable energy risk management. Applied Energy, 304, 117827.
Kang, C.-M., & Kim, D. (2022). Risk management transparency and compensation. Journal of Corporate Finance, 75, 102245.
Kapphan, I. (2012). Climate change, weather insurance design, and hedging effectiveness. Geneva Papers on Risk and Insurance: Issues and Practice, 37(2), 286–317.
Kozarevic, E., Kestovic, I., Kokorovic-Jukan, M., & Civic, B. (2012). The usage of derivatives in financial risk management by companies in Bosnia and Herzegovina. Economic Review – Journal of Economics & Business, 10(2), 59–72.
Martinez, P., & Green, D. (2024). The role of crypto derivatives in emerging financial risk systems. Financial Innovation Review, 11(1), 77–98. https://doi.org/10.1016/j.fininnov.2024.04.002
Modigliani, F., & Miller, M. H. (1958). The cost of capital, corporation finance, and the theory of investment. American Economic Review, 48(3), 261–297.
Müller, A., & Gräf, M. (2000). Weather derivatives for protection against weather risks: Speculation tool or integral element of risk management? Geneva Papers on Risk and Insurance: Issues and Practice, 25, 273–287.
Nance, D. R., Smith, C. W., & Smithson, C. W. (1993). On the determinants of corporate hedging. The Journal of Finance, 48, 267–284.
Phillips, A. (1995). Derivatives practices and instruments surveys. Financial Management, 24(2), 115–125.
Sain, R. (2025). Public debt management and the role of derivatives in Asian economies. Asian Economic Journal, 39(1), 15–40.
Smith, C. W., & Stulz, R. M. (1985). The determinants of firms’ hedging policies. Journal of Financial and Quantitative Analysis, 20(4), 391–405. https://doi.org/10.2307/2330757
Stulz, R. M. (1996). Rethinking risk management. Journal of Applied Corporate Finance, 9(3), 8–25. https://doi.org/10.1111/j.1745-6622.1996.tb00295.x
Selvi, Y., & Turel, A. (2010). Derivatives usage in risk management by Turkish non-financial firms and banks: A comparative study. Oeconomica, 12(2), 662–671.
Singh, A., & Upneja, A. (2008). The determinants of the decision to use financial derivatives in the lodging industry. Journal of Hospitality & Tourism Research, 32(4), 423–447.
Solomon, J. F., Solomon, A., Norton, S. D., & Joseph, N. L. (2000). A conceptual framework for corporate risk disclosure emerging from the agenda for corporate governance reform. British Accounting Review, 32(4), 447–478.
Šprčić, D., Tekavčič, M., & Šević, Ž. (2008). Corporate risk management practices in Croatian companies. Ekonomski Pregled, 59(7–8), 344–369.
Turvey, C. G. (2001). Weather derivatives for specific event risks in agriculture. Review of Agricultural Economics, 23(2), 333–351.
van der Zwaard, T., Grzelak, L. A., & Oosterlee, C. W. (2022). Relevance of wrong-way risk in funding valuation adjustments. Finance Research Letters, 49, 103091.
Wang, Y., & Zhao, L. (2025). Machine learning applications in derivative risk assessment. Journal of Financial Data Science, 7(1), 55–74. https://doi.org/10.3905/jfds.2025.1.007
Zivanovic, B., & Mina, K. (2017). The usage of financial derivatives in financial risk management by non-financial companies in Serbia. Industrija, 45(3), 65–82.
 
Volume 6, Issue 4 - Serial Number 22
November 2025
Pages 109-130

  • Receive Date 26 October 2025
  • Revise Date 09 November 2025
  • Accept Date 30 November 2025