| dc.description.abstract | Foreign exchange risk is a subject worrying
many holders of foreign currency denominated debt,
particularly in the developing countries. Foreign
currency funds are usually long-term in nature and,
in Kenya, are administered by development finance organizations,
mainly to finance industrial ventures.
The exchange risks arising are borne by the projects
• financed. This study is about exchange risk and how
it affects recipient projects.
The four main objectives of this study were;
(a) To investigate and determine the impact
of exchange risk on projects,
(b) To demonstrate the need for, and suggest
appropriate method of, incorporating
exchange risk in the analysis of projects;
(c) To develop a model for predicting exchange
7risk impacts, and
(d) To determine minimum hurdle rate(s) for projects holding foreign denominated currency
debt.
To meet the objectives of the study, a sample
of 55 projects was drawn from 109 projects financed
through foreign currency denominated loans, by the
Industrial Development Bank (IDB) and the Development
Finance Company of Kenya (DFCK), in the period 1974 -
1984 inclusive. Data to facilitate the computation
of expected and "actual" net present values (NPVS)
and internal rates of return (IRRS), and to develop
the predictive model was collected for each of the
projects in the sample. "Actual" NPVS and IRRS were
computed by adjusting the cashflows of a project to
reflect exchange losses. The regression model was designed
to predict the absolute impact, of exchange risk,
on a project's expected NPV. The predictor variables
selected were the cost of the projects the expected
NPV, and the amount of the foreign currency denominated
funds.
The results of the study revealed significant
impacts on the net present 'values of projects. Exchange
risk changed the expected NPVS of projects by as
much as 4.56 to 2313 percent. The regression model
developed has an R2 of 59.3 percent. The hurdle rates
of return were. found to range from 0.5 to 7.9 percentage
points above the expected IRR, with an average
of 2.6 percentage points. Cashflow adjustment was established
as the "best" met,hod of incorporating exchange
risk in the analysis of projects. | en |
