Factors Influencing Foreign Exchange Risk Hedging in Manufacturing Firms Listed at the Nairobi Securities Exchange in Kenya

Abstract

The foreign exchange market experiences dynamic volatility which affects the performance of firms and there is need for the firms to manage such exposures related to foreign exchange rate movements. Firms with exports and imports are significantly affected by currency risks and this study sought to establish the factors that influence foreign exchange risk hedging among manufacturing firms listed at the Nairobi Securities Exchange in Kenya. Specifically, the study sought to establish the influence of foreign exposure, financial distress, firm size and liquidity on foreign exchange risk hedging. The study employed descriptive research design and targeted the listed manufacturing firms at NSE. Secondary data was collected from 10 listed manufacturing firms using the NSE and CMA websites. Statistical package for social sciences (SPSS Version 23.0) was used to analyse the data. From the analysis of the findings, it was concluded that foreign exchange risk hedging in the manufacturing firms in Kenya listed at the Nairobi securities exchange was influenced by financial exposure, financial distress and liquidity. Hence, it was recommended that manufacturing firms should develop and document hedging policies. The research revealed that derivatives usage in emerging markets was low compared to developed world; the research recommends that regulatory authorities review market completeness, regulations and investor knowledge. Moreover, it was recommended that manufacturing firms establish a robust and tested framework for risk management specifically on foreign exchange risk hedging and that market regulators should enact legislation and guidelines to enable Kenyan firms to hedge foreign exchange risk through prudent management of financial exposure, financial distress and liquidity