Studying the Role of Financial Risk Management on Return on Equity

Abstract

Nowadays risk has an important role in all countries, and its management is valuable for banks to the extent thatthey publish their applying methods about risk management and their operations and results in a scheduled ordertoward customer orientation in order to gain stockholders’ confidence. In this article, three instruments of bankrisk management are represented by means of financial ratios consisting of interest rate risk, capital risk and riskof natural hedging. So, the basic problem in this paper is the impact of risk management on stockholders’ wealth.Stockholders’ wealth is measured by Return on Equity (ROE). This article has three hypotheses, the major oneof which is that there is a significant correlation between risk indices and ROE. Results show that interest raterisk and diversification risk have significant correlation with ROE, but there is no significant correlation betweencredit risk and ROE.

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