Relationship Between Financial Hedging Strategies and Financial Performance: a Case Study of Kenya Airways Limited

Abstract

Financial hedging is an important means of risk management. Financial hedging reduces a firm’s systematic risk, encouraging firm-specific investment by stakeholders. Financial hedging also acts as a firm’s incentives to manage risk through diversification and leads to increased firm- specific investment by stakeholders. When financial hedging products are available, the opportunity to hedge systematic risks using these products changes a firm’s incentive to manage risk through diversification. Financial hedging reduces risks through trading financial instruments such as forward and futures contracts, swaps, and options. The aim of this study was to establish the relationship between financial hedging strategies and financial impact (gain or loss) on Kenya Airways Limited. The study adopted descriptive study design. The study used both primary and secondary data from financial statements at Kenya Airways and interviews to financial managers. Data was analyzed using descriptive statistics (frequencies, percentage, mean and standard deviation) and regression analysis. Results were presented in form of tables, bar graphs and pie chart while explanation was done in prose. The study findings revealed that Kenya Airways had adopted the financial hedging strategies in the financial management. These strategies include forward contract for currencies, money market operations for currencies, and forward exchange contract for interest and money market operations for interest. Financial hedging strategies at Kenya Airways have reduced financial risks such as commodity risk, interest rate risks and volatility risks. Financial hedging strategies have therefore led to reduction in financial loss and improved financial performance. The study also noted that the company can reduce the financial impact on profitability through adoption of hedging on all major expenses denominated in US dollar.