dc.description.abstract | Foreign exchange risk management is complex and requires a thorough understanding
of the banks business needs, its internal and external environment and exposures to
the financial markets. Challenges abound as banking institutions commit themselves
to improving risk management practices. The banking industry in Kenya is
characterized by numerous teething problems. These emanate from their calibre of
target customers and the seemingly liberal and/or informal system of operations.
Many of the standard tools used to hedge currency risk, such as futures, swaps and
options contracts, are either not available in emerging markets or, where available, are
traded in illiquid and inefficient markets, making the range of products available
extremely limited. This has put an extra burden on corporate treasurers to be able to
find adequate hedge to their exposures in exotic currencies. The objective of the study
was to establish the effect of foreign exchange risk management on the financial
performance of commercial banks in Kenya.
The research used a descriptive research design. The target population comprised of
the forty three (43) commercial banks in Kenya. The study used census approach to
pick all the 43 commercial banks in Kenya since the population is not large. The study
made use of secondary data. The multiple linear regression analysis was applied to
examine the extent of influence of the independent variable on the dependent
variables.
The regression analysis established that ROA = 1.627 + 13.491*Options +
3.113*Forward Contracts + 4.820*Cross Currency Swaps + 0.720*Leading and
Lagging - 0.071*Price Adjustments + 0.044*Netting .The study further found that
there is a strong relationship between dependent and independent variables given an
R2 values of 0.856 and adjusted to 0.801. This shows that the independent variables
(Options, Forward Contracts, Cross Currency Swaps, Leading and Lagging, Price
Adjustments, Netting) accounts for 80.1% of the variations in profitability as
measured by ROA. | en_US |