Foreign Exchange Risk Management Practices : a Survey of Motor Vehicle Industry in Kenya

Abstract

The motor vehicle industry in Kenya plays an important role in the economy being one of the major sectors in transport. Studies have been done in foreign exchange risk management stock exchange markets and financial institutions. However there are no studies done in the foreign exchange risk management practices in the motor industry in Kenya. The main objective of this study was to establish whether motor vehicle industry in Kenya hedge against foreign exchange movements and the techniques (instruments) they use in hedging. The target population for this study are the distributors of brand new vehicles and spare parts in Kenya. The research data was collected in Nairobi. A census survey method was used since the study units are few (20 Distributors) and therefore it‟s more effective and efficient method rather than carry out the study on sample basis. Primary data was collected using structured questionnaire. The questionnaire was self administered through interview and drop and pick later where the researcher did not have a chance for interview. Collected data was then analysed using descriptive statistics such as measures of variation and measures of central tendency. The results were then being presented in the form of frequency tables, charts and graphs where necessary. From the research, employee loyalty is important since it ensures the well being of a company. In addition, firms ought to understand the risks facing them and should come up with ways of coping with them since risks add to their costs and curtail their operations. The distributors in of motor vehicle recognize that risk pertaining to foreign exchange from the fact that all the firms have documented foreign currency policy and treasury department. In addition all the firms‟ hedge against foreign currency fluctuation and most firms use forward contract to hedge (56.3%). The most firm use forward contracts buy and save currency in advance, price adjustment and negotiation are moderately used while netting prepayment swaps and delayed payment are not used by most firm. The foreign exchange risk management methods used by the firms in the motor industry are varied depending on internal and external factors this is in line with the findings of Reid & Smith (2000).