The effect of foreign exchange risk management strategies on the financial performance of forex bureaus in Nairobi county
Forex bureaus operate in an industry that is dynamic coupled with uncertainties, which if not properly understood and measures put in place to manage such unforeseen circumstances can be detrimental to the financial health of the bureaus. There is a growing literature linking foreign exchange risk management to bureaus performance and the results are diverse. This study thus sought to assess the effect of foreign exchange risk management strategies on financial performance of Forex bureaus in Nairobi County. A descriptive study design was utilized to examine and explore descriptive characteristics of several variables of interest. The target population for this study constituted the 65Forex bureaus in Nairobi County licensed by the Central Bank of Kenya calling for a response rate of 71% (46 bureaus). The primary data was collected from the bureaus by use of self-administered questionnaires to principal dealers, senior accountants, and/or management personnel. Secondary data was obtained from the bureaus financial statements records at the Central Bank of Kenya. Using Statistical Package for Social Scientist (SPSS), multiple linear regression analysis was employed to examine the magnitude of influence of the independent variable on the respective dependent variable. Findings show a significant relationship between earnings after tax, a determinant of financial performance and use of strategies such as forward contracts, money market hedge and currency options in hedging against foreign exchange risk exposure. All the other independent variables studied also showed a positive relationship. Further to that, descriptive statistics show that Chief Executive Officers were dominantly involved in defining the foreign exchange management policies while implementation was the charge of the either the financial manager or the finance officer in charge. From the findings of this research, the study recommends that forex bureaus should explore avenues to enhance capacities within them for managing foreign exchange risk for instance providing training opportunities inform of updating firm specific skills and more in house training. In addition, the management should opt for cost effective and innovative strategies such as Futures contracts and derivatives which are increasingly becoming popular in global market and can be used for hedging.