Design and valuation of Kenya shilling currency options
![Thumbnail](/bitstream/handle/11295/24413/MAGIRI%20E.%20NJATHA%20PGD%20ACTUARIAL%20SC.%2020090001.pdf.jpg?sequence=5&isAllowed=y)
View/ Open
Date
2009Author
Magiri, Elizabeth N
Type
ThesisLanguage
enMetadata
Show full item recordAbstract
Foreign exchange rates have become a source of concern for most
manufacturers and the business community as a whole. Since Kenya
maintains a flexible exchange rate, the value of the kenya shilling is
determined by the market forces of supply and demand.
Thus any events that could potentially harm the country's stability
or are percieved by the international markets as having an effect on
the local economy,have a direct impact on the value of the shilling
and may cause its value to fluctuate.
Since events affecting the value of any currency can not always be
predicted accurately, movements in the foreign currency markets often
leave substantial amounts of loss in their wake.
If a manufacturer has to import raw materials then a depreciation in
the local currency would result in higher production costs as more
units of the local currency would be required to purchase a unit
of the foreign currency. It would therefore cost more to impport
goods.
On the other hand if the local currency appreciates against major
world currencies then exporters would have to accept a cut in
their profit margins since their products would not be competitively
priced owing to high production costs locally as a result of strong
local currency. "\
This paper aims to design .a financial instrument that would be used
by firms to hedge against foreign exohjrage exposure.
. , The currency values and trade volume data that will be used in this
paper are for the year ending 2007 as compiled by the central bank
of kenya. '
Given that Kenya's balance of trade up to the year ending 2007 was
negative; this imp;ies that the country imported more than it exported.The
major currencies used in terms of trading volume were the US
Dollar, the Euro and the British Pond Sterling.
This paper will structure and price currency derivatives with the
shilling against these three major currencies.
Citation
PGD- Actuarial ScienceSponsorhip
University of NairobiPublisher
School of Mathematics, University of Nairobi
Description
PGD- Actuarial Science