The Effect of Currency Derivatives on the Values of Listed Commercial Banks in Kenya
Abstract
Despite the use of derivative contracts by banks having increased over the past two decades, the
effect of derivatives on risks and market value of banks is still largely unknown. Despite more
widely available data on derivative usage, the evidence obtained from empirical research on its
effects is mixed. One possible answer to such contradictory results is whether banks use
derivatives for trading or hedging purposes. Previous studies have used data disclosed by all
kinds of firms including non-financial firms and banks, in trying to improve understanding of
how firms use derivatives.This study seeks to fill the existing research gap by conducting a study
on the effect of foreign exchange exposure on the value on listed commercial banks in Kenya.
The study intends to address the following question: What is the effect of currency derivatives on
the value of listed commercial banks in Kenya?This study adopted a descriptive research design
which generally describes characteristics of a particular situation, event or case.The population
of the study will constitute 10 listed commercial banks that were in operation as at December
2013.The study findings established a positive coefficient for price of swaps at 5% level of
significance. A unit increase in price of swaps will lead to 1.469 unit increase in the value of the
firm. Price option is positively related to the value of the firm. With a p-value of 0.033, price of
options is statistically significant at 5% level of significance. A unit increase in price of options
will lead to 3.719 units increase in the value of the firm. Size of the bank is statistically
significant at 5% level of significance in explaining the variation in the value of the firm. A unit
increase in the bank‘s size will lead to 3.015 unit increase in the value of the firm. Based on the
study findings, the study recommends that commercial banks should encourage the use currency
derivatives because derivatives reduce the likelihood of financial distress by decreasing the
variability in firm value, thus reducing the expected costs of financial distress. Commercial
banks should avoid operating in debt. Leverage refers to the proportion of debt and equity in the
capital structure of a firm. The financing or leverage decision is a significant managerial decision
because it influences the shareholder‘s return and risk and the market value of the firm.
Citation
Master of Science in Finance, University Of Nairobi 2014Publisher
University of Nairobi