Article

Managing foreign exchange risk among Ghanaian firms

September 2005
The Journal of Risk Finance 6(August):306-318

September 2005
6(August):306-318

DOI:10.1108/15265940510613642

Source
RePEc

Authors:

Joshua Yindenaba Abor

University of Ghana

Purpose This paper reports on the foreign exchange risk‐management practices among Ghanaian firms involved in international trade. The study focuses on how Ghanaian firms manage their foreign exchange risk and the problems involved in managing exchange rate exposure. It also seeks to ascertain the extent to which these firms use foreign exchange risk management techniques. Design/methodology/approach Descriptive statistics were used in the presentation and analysis of empirical results. Findings The results indicate that close to one‐half of the firms do not have any well‐functioning risk‐management system. Foreign exchange risk is mainly managed by adjusting prices to reflect changes in import prices resulting from currency fluctuation, and also by buying and saving foreign currency in advance. The main problems the firms face are the frequent appreciation of foreign currencies against the local currency and the difficulty in retaining local customers because of the high prices of imported inputs, which tend to affect the prices of their final products sold locally. The results also show that Ghanaian firms involved in international trade exhibit a low level use of hedging techniques. Originality/value The main value of this paper is the analysis of foreign exchange exposure management from the Ghanaian perspective. Relevant recommendations aimed at enhancing the foreign exchange risk‐management practices among Ghanaian firms are made. The paper is useful not only to firms involved in international trade, but also to financial institutions interested in providing hedging products to these firms.

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Banks are required to maintain an appropriate level of capital which must commensurate with the riskiness of their portfolio. Recently, the Reserve Bank of India (RBI) issued a circular on Prudential Guidelines on Capital Adequacy—Implementation of Internal Models Approach (IMA) for Market Risk to select a suitable method for the banks to determine the regulatory capital requirement under the market risk exposure. Banks which adopt this approach are required to quantify market risk through their own Value-at-Risk (VaR) model. Therefore, it is a challenging task for risk managers of the bank to select an appropriate risk model which reasonably covers the risk of the bank’s portfolio. Use of wrongly calibrated risk models may lead to undercapitalised banking system. This article aims at exploring the suitable risk model for measuring foreign exchange risk in banks’ portfolio. The objective of present study is to empirically test the appropriate VaR model for foreign exchange rate risk. Value-at-Risk has been estimated for foreign exchange rate risk by using parametric variance–covariance method and non-parametric historical simulation (HS) method. Under parametric method, VaR is estimated by assuming that returns follow normal and Student’s t-distribution. Backtesting results for various VaR models have been done based on Kupiec’s proportion of failures (KPOF) test and regulatory ‘traffic light’ test. This article concludes that when returns are non-normal, VaR model based on the assumption of normality significantly underestimates the risk. Our empirical results based on backtesting show that most accurate VaR estimates are obtained from Student’s t VaR model.

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Mar 2015
J Eng Des Tech

Purpose: The purpose of this paper is to report the findings of research into the levels of awareness, usage and benefits of risk assessment and management processes (RAMP) within the construction industry in Ghana. Design/methodology/approach: The study was conducted through a structured questionnaire administered to 103 construction professionals practising with construction client (private and public), consultant and contractor organisations within the Ghanaian construction industry. The results were analysed in order to establish the current levels of awareness, usage and perceived benefits of risk management practices. Survey response data was subjected to descriptive statistics; subsequently, analysis of variance (ANOVA) and other non-parametric tests were used to examine the differences in the levels of agreement of the perceived benefits. Findings: This study illustrates that although the majority of the respondents are aware of risk assessment and management practices, some professionals found the process not to be formal. Relative to the benefits, there was a disparity in the ranking of agreement scores on 2 of the 8 benefits among the respondents in relation to ‘product to the required quality’ and ‘reduction in contract claims’. However, they all agreed on ‘improved team morale’ as the most important benefits. Research limitations/implications: The research limitation of the study is that the cross sectional data made it difficult to generalise the findings. Geographically, only respondents from construction organisations in the Greater Accra Region were considered. However, it is recommended that future work on RAMP be extended to cover all the regions of the country. Practical implications: The findings of the study provide practical for organisations to measure the benefits and capture the awareness of risk management practices through the provision of a framework based on an index and scoring method. This can be used by senior management in assessing the current benefit levels within projects “internal benchmarking”, and has potential for external benchmarking purposes. Furthermore, through education and training, both formal and informal process including more information and provision of expertise within RAMP could enhance the levels of awareness. Originality/value: Little is known about the current levels of awareness, usage and benefits of risk management among Ghanaian construction organisations, and this study provides some insights and deepening our understanding on the uptake and perceived benefits of RAMP among construction professions in Ghana. These findings may help construction practitioners in having an increased awareness of risk management practices, and this can further lead to a higher uptake and usage resulting in reaping the advocated benefits of the implementing risk management practices such as achievement of project objectives of time, cost and quality, as well as enhanced decision making processes. Keywords: Ghana, Risk management, Usage, Benefits, Practice, Construction industry

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In recent years, the volume of international trade has increased enormously due to the effects of globalization and liberalization of trade. However, political and economic changes, changes in consumer demand, market structures, product and market life cycles, domestic and foreign competition and the degree of effects caused by these changes became more and more significant. Such changes force the firms making or intending to make business globally to implement dynamic strategies and action plans. Considering above mentioned points, this study aims to explore the risks perceived by the exporting firms about financial risk and payment terms within the context of international trade. The firms are analyzed depending on various criteria (i.e. export intensity, firm size, sectors, geographical locations, export activity, age of the firms, export experience). The results of the study indicates that risk perceptions of exporter firms operating in the Aegean Region of Turkey vary by operating in various sectors, sizes, geographical location, types of export activity, age. On the other hand export intensity and experience of exporters do not affect the risk perceptions of exporter firms significantly.

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The government of Ghana has implemented a number of policies to strengthen the production and export of non-traditional products as a way of diversifying exports in Ghana with very little success. Foremost among these policies is the liberalisation of exchange rate. Meanwhile, the exchange rate has been very volatile. The study, therefore, examines the effects of exchange rate volatility on non-traditional exports in Ghana.This study employed Autoregressive Distributed Lag (ARDL) cointegration estimation technique for the investigation. The results indicate that exchange rate volatility negatively impacts Ghana’s non-traditional exports. Also, the effect is greater in the long- run than it is in the short-run. Other results also show that world income, growth rate of the economy and Treasury bill rate promote non-traditional exports, but real effective exchange rate does not. rThe value of the paper lies in the discussion of the short-run and long-run effects of exchange rate volatility on non-traditional exports in the Ghanaian context.

Effects of Exchange Rate Volatility On Non-Traditional Exports In Ghana

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Full-text available

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Camara Kwasi Obeng

The government of Ghana has implemented a number of policies to strengthen the production and export of non-traditional products as a way of diversifying exports in Ghana with very little success. Foremost among these policies is the liberalization of exchange rate. Meanwhile, the exchange rate has been very volatile. The study, therefore, examines the effects of exchange rate volatility on non-traditional exports in Ghana.This study employed Auto-regressive Distributed Lag (ARDL) co-integration estimation technique for the investigation. The results indicate that exchange rate volatility negatively impacts Ghana’s non-traditional exports. Also, the effect is greater in the long- run than it is in the short-run. Other results also show that world income, growth rate of the economy and Treasury bill rate promote non-traditional exports, but real effective exchange rate does not. The value of the paper lies in the discussion of the short-run and long-run effects of exchange rate volatility on non-traditional exports in the Ghanaian context.

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Thesis

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Since the collapse of Afghanistan’s late president Dr. Najeeb Ullah’s tenure of presidency and the escalation of the then civil turmoil, started in the late 1990s, the currency of Pakistan (Rupee) has dominated the eastern and southeastern markets of Afghanistan. The circulation of Rupee in the Afghan markets has posed financial challenges for the local vendors (i.e. customer loss, reduced market size, and poor financial performance). Consecutively, after the Taliban militants took over control of the country’s agencies and eventually the whole government in 1992, Ehsanullah Ehsan, the chairman of the central bank of the Taliban regime laid off the contract with Russian firms to put out printing the Afghani notes, that he claimed were worthless. Besides, several macro factors (e.g. political instability and foreign interference) have led to a dramatical collapse of the country’s economy. Which is why, the Afghani lost its value both in the regional and international markets. In addition to that, different Warlords in that point of time had introduced their currencies without any formal approval and standard procedure of the state’s central bank (i.e. Da Afghanistan Bank). Therefore, people who were living across the Durand line were forced to start their daily transactions using Rupee which has caused Afghanistan to financially, economically, and politically rely on Pakistan. Ever since Rupee has been used as a partially legal tender in the eastern and south-eastern markets of Afghanistan. The results show that the performance of various local businesses in terms of making a profit, quality of the commodities, market size, and level of sales, have been negatively affected due to the fall in the value of Rupee. However, the local authorities have recently imposed an abrupt ban on the use of Rupee across the city of Jalalabad, still, ordinary people and the local vendors have witnessed losses caused by the sudden change in the rules. This is because the shopkeepers who defy adhering to the rules and continue to use Rupee would have to bear potential consequences (i.e. their shops will be shut for several days). Additionally, ordinary citizens and the sole proprietors also do their dealings in Rupee. As a result, a mismatch between the Afghani and the Rupee takes place, because the rate of a country’s currency is linked to the degree of its macro factors, export and imports. Likewise, Pakistan’s current account deficit has faced downslides and have been estimated to face further crises, which will lower the value of Rupee, and ultimately affect both the rate of Afghani and the performance of the local businesses in Afghanistan either directly or indirectly. Hence, the current study, based on its findings suggests policymaker recommendations to outline a research-based strategy to avert the future ramifications and a gap for the researcher to conduct further studies concerning this issue.

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In the recent globalised financial markets, financial markets are more integrated which leads to more foreign exchange risk for firms. In such scenario currency derivatives are top most operational hedging strategy to manage foreign exchange risk. This scenario is different in developed and emerging markets as turnover of derivatives is growing swiftly in emerging markets and uses of currency derivatives is common but lower in comparison to the interest rate derivatives. In emerging markets (Hong Kong, Singapore and Brazil) use of currency derivatives is fifty per cent of total derivative traded follow by equity derivatives and interest rate derivatives (Mihaljek and Packer, 2010). The benefits of doing hedging have been discussed by many finance experts. These include classic contribution by Miller and Modigliani (1958) and then by Smith and Stulz (1985). Several studies have employed the questionnaire approach for the analysis of exchange-rate exposure management in non-financial firms (e.g. Bodnar and Gebhardt, 1999; Hakkarainen et al., 1998; Bodnar et al., 1998; Marshall, 2000; Ceuster et al., 2000; Mallin et al., 2001). The most refered study is Bodnar et al. (1998), which considered publicly traded U.S. firms. The present study examines the forex risk management by SMEs and unlisted non-financial forms in the form of literature review.

Impact of shariah -compliant status on firms’ decision to practice forex hedging

Article

Full-text available

Oct 2019

Purpose The purpose of this paper is to investigate whether the shariah -compliant status of the firms negatively influences their use of foreign exchange hedging instruments. Design/methodology/approach This paper uses a logit panel regression on 350 firm-year observations from 70 nonfinancial listed firms over the period from 2010 to 2014. Shariah -compliant companies account for about 84 per cent of the sample firms. Findings Preliminarily, the results show that none of the samples of the shariah -compliant firms report any use of Islamic hedging instrument, either in the form of wa’d or tawarruq . The results of the study’s logit panel regression contradict the authors’ prediction that the shariah -compliant status negatively influences firms’ decision to hedge. In contrast, shariah -compliant companies are twice as likely as their conventional counterparts in adopting forex hedging. Research limitations/implications This study is limited to information disclosed in the items 31, 36 and 37 of financial management policies in the annual report. However, given that shariah -compliant firms must abide by the limit of 5 per cent profits before tax from clearly prohibited activities (including riba’ ), the need for exclusive disclosure on the adoption of Islamic or conventional hedging appears to be imperative for the viability of the Malaysian Islamic capital market. Practical implications In evaluating the shariah compliance of a company, investors (individual or institutional) must look further than just interest-based riba’ in mixed-business companies to ensure that they comply with the 5 per cent maximum requirement on the non-halal business contribution to profit. This is because the finding of this study indicates that shariah -compliant companies are twice as likely to adopt forex hedging, when none of them reports the use of Islamic hedging tools. Investors must therefore give ample allowance to riba’ that can be induced through the use of conventional forex hedging instruments. This is until the security market regulator imposes a requirement on shariah -compliant companies an explicit disclosure of the use of Islamic versus conventional hedging tools, as they had done in the case of Islamic versus conventional debt instruments. Social implications Muslim and socially responsible investors rely on the Shariah-compliant status of the company in ensuring that their wealth grows according to the Shariah principles. To sustain and develop the Islamic capital market which the firms have been relying on for external capital, Shariah -compliant firms and the authority awarding the status are equally responsible for honoring the trust that these investors by ensuring the permissibility (halal) of the business and the conduct of their business. Originality/value Conventional forex hedging instruments are criticized for violating as-sarf , a shariah principle, which requires the exchanges of particular assets (gold, silver and currency) to be delivered on the spot, and thereby infusing riba’ al-fadhl . Although Islamic ( wa’d - or tawarruq -based) hedging instruments are widely available by Islamic banks in this country since they were introduced by Bank Negara Malaysia in 2010, paradoxically, the authors’ observation indicates that none of the studied firms reports the adoption of these instruments in their annual reports.

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Article

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The adoption of floating foreign exchange rate regime in the 1990s and international trade have led to increased exposure of Kenyan firms to foreign exchange risk. Foreign exchange risk can affect a firm’s expected cash flows, and by extension, its financial performance. This paper examines the effects of foreign exchange risk hedging techniques on the financial performance of publicly listed firms in Kenya. The target population constituted all the 54 firms that were continuously listed on the Nairobi Securities Exchange during the study period, from 2011 to 2016. The study used panel data research design. Secondary data was obtained from financial statements of the listed firms. The data was coded and analysed using descriptive and inferential statistics—correlation and regression—with the aid of STATA software. The feasible generalised least square model was used to test the hypotheses. The results show currency hedging has a positive effect on financial performance. This implies that when hedging strategies and hedging tools are implemented appropriately, they help firms achieve their financial objectives, increasing financial performance, hence creating value for shareholders.

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Conference Paper

Full-text available

Nov 2008

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This paper aims to add our understanding on how availability of learning mechanism affects the development of a business relationship. The mechanism is one of four dimensions of learning orientation. The paper was developed based on a qualitative study on six British companies exporting to the Indonesian market. Face to face interviews were carried out in the UK and Indonesia. An interesting finding was that availability of learning mechanism facilitates the development of business relationships since the mechanism stimulates the development of satisfaction and commitment. Two aspects of the mechanism, i.e. variety and frequency of learning affect a company's ability to manage risks and acquire market/customer knowledge, which explain the fluctuation of satisfaction and commitment.

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Jan 2017

Muhammad Anwar

The study aims to explore risk management practices used by financial and non-financial firms of Pakistan. Self-reported questionnaires were distributed using convenience sampling method among financial and non-financial firms. The results indicate that non-financial firms used risk management practices but the percentage is low as compared to financial firms. Firms engaged in international trade used risk management practices and followed the procedure needed for evaluating and managing risk. Although these firms have a small portion of operating revenue and operating cost in foreign currencies. The financial managers of these firms make risk reports to their top managers as per their policies and requirement. New FASB rules also affect their derivatives usage.

Effects of Exchange Rate Volatility on Non-Traditional Exports in Ghana

Working Paper

Full-text available

May 2017

Camara Kwasi Obeng

Risk Management in Rural and Community Banks: The Ghanaian Experience

Article

Full-text available

Apr 2015

Despite the significance of effective risk management practices in deepening prudent financial management in Ghana's Rural and Community Banks (RCBs) there appear to be a paucity of empirical studies highlighting the various kinds of risks faced by RCBs. Such studies will enhance RCBs understanding of the extent to which Ghana's RCBs operations are affected by ineffective risk management practices. The purpose of this paper therefore is to examine the extent to which Ghanaian Rural and Community Banks deploy risk management practices in addressing the types of risk affecting their operations using data through a survey involving respondents from Rural and Community Banks and Bank of Ghana/ARB Apex bank. The study uses primary data collected through survey questionnaire from respondents sampled from the RCBs and the Bank of Ghana/ARB/Apex Bank. The research also uses secondary data collected from the ARB/Apex Bank quarterly reports on Rural and Community Banks operations in Ghana. Our empirical findings indicate that credit risk, liquidity risk, operational risk and legal /regulatory risk are the major forms of risk affecting rural and community banks in Ghana. The paper recommends the enforcement of risk management regulations by the ARB Apex Bank and the Bank of Ghana. On the other hand, Rural and community banks should create risk management department and recruit qualified and experience personnel to ensure effective and efficient risk management practices. The research focused on Rural and Community Banks in Ghana and as such the results may not necessarily represent RCBs in other countries.

Evaluating key risk factors for PPP water projects in Ghana: a Delphi study

Article

Full-text available

May 2015
J Facil Manag

Purpose – This paper aims to report on the partial findings of a research project on risk allocation in public–private partnership (PPP) water projects. It identifies risk factors encountered in PPP water infrastructure projects, evaluates their associated risk levels and presents an authoritative risk factor list to assist the sector institutions to understand the important risks associated with such projects in Ghana. Design/methodology/approach – A ranking-type Delphi survey was conducted to develop a rank-order list of critical risk factors. Findings – Twenty critical risk factors with high impact on water PPPs were established. The top-five risks relate to foreign exchange rate, corruption, water theft, non-payment of bills and political interference. Originality/value – Being the pioneering study, it holds implications for practitioners. By prioritising the risks according to their relative impacts on the success of water PPP projects, public and private participants will become more aware of and leverage efforts and scarce resources to address those significant factors with serious consequences on projects objectives. The paper adopts a research approach that can be used by future researchers in similar environments where PPP is novel and experts are hard to find.

Theoretical Framework of Foreign Exchange Exposure, Competition and the Market Value of Domestic Corporations

Article

Full-text available

Jan 2013

The purpose of this study is to examine the foreign exchange rate exposure of domestic corporations in the United Arab Emirates (UAE) and the implications of that exposure for the market value of those corporations, considering the effect of competition as a determinant of exchange rate exposure. The justification for this study is that the UAE has an open economy with a high per capita income and a sizable annual trade surplus. In addition, the World Economic Forum issued its Global Competitiveness report for the year 2010-2011 in which the UAE was the only Arab country that was included in the elite club of countries that have shown an increment in endorsing new and improved methods for developing their economies. However, because of the indirect nature of foreign exchange rate exposure for local or domestic firms, the managers of these firms are unwilling to engage in hedging activities that may mitigate exchange rate exposure. A change in prices, the cost of final goods, the cost of raw material, labor costs or the costs of input or output and other substitute goods due to fluctuating exchange rates may have an adverse effect on the competitive position of a local or domestic firm with no international and foreign activities. The outcomes of this study will determine whether the domestic firms are exposure to the fluctuation of foreign exchange rates.

Risk management in the Ghanaian insurance industry

Article

Full-text available

Apr 2013

Purpose The purpose of this paper is to examine the risk management practices of life assurance firms and non‐life insurance firms. Design/methodology/approach Through a comparative case study methodology, the study assesses the state of risk management in both life assurance companies and non‐life insurance firms to determine whether they exhibit different or similar risk management practices. The results of the survey were also analyzed and compared to the principles of good practices in financial risk management. Findings The findings of the study revealed some differences and similarities in the risk management practices of life and non‐life insurance firms. Almost all the life companies have stated their risk appetite levels, which enable them to identify which risks to absorb and which ones to transfer. But non‐life insurance firms have not laid down their risk tolerance levels explicitly. The results further revealed that the industry lacks sufficient personnel with the requisite risk management skills and that the sector does not manage risks proactively, rather they do so in a reactive response to regulatory directives. Practical implications Effective management of risks by insurers will increase the penetration of insurance in Ghana. Social implications Risk management is a crucial issue, not only for the survival and profitability of the insurance industry, but also for the socio‐economic growth and development of the whole economy. As major risks underwriters, insurance companies need to adopt good practices or quality measures in the management of financial risk. This is important, more so, as the industry prepares to re‐position itself to underwrite the risks in the emerging oil and gas industry of Ghana. Originality/value Research into financial risk management in the insurance industry from the Ghanaian perspective is rare. This study is therefore timely and its findings are invaluable for the efficient management of financial risk in the insurance industry.

Exchange rate exposure: Do size and foreign operations matter?

Article

Full-text available

Aug 2007
Manag Finance

Purpose The purpose of this paper is to examine the effect of firm size and foreign operations on the exchange rate exposure of UK non‐financial companies from January 1981 to December 2001. Design/methodology/approach The impact of the unexpected changes in exchange rates on firms’ stock returns is examined. In addition, the movements in bilateral, equally weighted (EQW) and trade‐weighted and exchange rate indices are considered. The sample is classified according to firm size and the extent of firms’ foreign operations. In addition, structural changes on the relationship between exchange rate changes and individual firms’ stock returns are examined over three sub‐periods: before joining the exchange rate mechanism (pre‐ERM), during joining the ERM (in‐ERM), and after departure from the ERM (post‐ERM). Findings The findings indicate that a higher percentage of UK firms are exposed to contemporaneous exchange rate changes than those reported in previous studies. UK firms’ stock returns are more affected by changes in the EQW, and US$ European currency unit exchange rate, and respond less significantly to the basket of 20 countries’ currencies relative to the UK pound exchange rate. It is found that exchange rate exposure has a more significant impact on stock returns of the large firms compared with the small and medium‐sized companies. The evidence is consistent across all specifications using different exchange rate. The results provide evidence that the proportion of significant foreign exchange rate exposure is higher for firms which generate a higher percentage of revenues from abroad. The sensitivities of firms’ stock returns to exchange rate fluctuations are most evident in the pre‐ERM and post‐ERM periods. Practical implications This study provides important implications for public policymakers, financial managers and investors on how common stock returns of various sectors react to exchange rate fluctuations. Originality/value The empirical evidence supports the view that UK firms’ stock returns are affected by foreign exchange rate exposure.

An Empirical Study of Forex Risk Management Strategies

Article

Full-text available

Apr 2008

There are a variety of strategies which are designed to manage foreign exchange risk. Each of them, however, is constructed under specific assumptions, for a specific risk profile. It is often the case that several strategies are applicable to a given scenario. The question arises as to which strategy would be expected to yield the best results in a given scenario. The current study addresses this issue empirically, using a set of simulated foreign exchange cash flows to compare the profits resulting from the use of different foreign exchange risk management strategies. The risk management strategies considered for the study are: forward currency contacts, currency options, and cross-currency hedges. The study analyzes and evaluates these foreign exchange risk management strategies to find out which of the strategies is appropriate in particular situations.

Forex Risk Management Strategies for Indian IT Companies

Article

Sep 2009

Mihir Dash

Foreign exchange risk is the effect that unanticipated exchange rate changes have on the value of the firm. There are a variety of strategies which are designed to manage foreign exchange risk. Each of them, however, is constructed under specific assumptions, for a specific risk profile. It is often the case that several strategies are applicable to a given scenario. The question arises as to which strategy would be expected to yield the best results in a given scenario.This study deals with the impact of currency fluctuations on cash flows of IT service providers (who would be receiving foreign currencies), and explores various strategies for managing transaction exposure from this viewpoint. The risk management strategies considered for the study are: forward currency contacts, currency options, and cross - currency hedging. The study analyzes and evaluates these foreign exchange risk management strategies to find out which of the strategies is appropriate in particular situations.

Using analytic hierarchy process to determine forex risk hedging strategies of SMEs

Conference Paper

Jan 2023

EFFECTS OF FOREIGN EXCHANGE HEDGING PRACTICES ON FINANCIAL PERFORMANCE OF NON-FINANCIAL FIRMS: A CASE OF LISTED COMPANIES AT NAIROBI SECURITY EXCHANGE

Article

Full-text available

Oct 2016

NELSON WARAMBO OCHIENG

The Impact of Exchange Rate Volatility on the Performance of Ghana's Economy

Article

Full-text available

Jul 2022

This research investigates the impact of the volatility of Ghana's three major trading currencies on the economy using quarterly data from 2009 to 2021. Analysis was carried out using regression technique. Multiple Regression analysis was run after conducting a unit root and co-integration tests. The study concludes that a positive and significant relationship exists between foreign exchange rate movement and economic performance especially with the US Dollar and the pound sterling. It can be concluded that the devaluation that results from the increase in the exchange rate has an expansionary effect on the GDP. A depreciation of local currency decreases the prices of domestic goods while, at the same time, makes the prices of goods from abroad much more expensive. Thus, a depreciation of the exchange rate firstly increases the volume of net export and then the growth rate of the economy. The outcome of the study would serve as a guide to policymakers, such as the government and the central bank to adopt the best policies that would support the growth of the economy.

Nigeria-China Swapization and the Sinking Nigerian Currency

Article

Full-text available

Dec 2021

The paper examined the Nigeria-China swapization and the sinking Nigerian currency. The paper adopted qualitative research approach, with descriptive research design and content analysis. The findings revealed the effects of swapization to Nigerian sinking currency such as: liquidity, foreign reserve management, currency fluctuation, foreign exchange stability, alternative currency for super-sovereign reserve. The paper therefore, concluded that, swapization cannot guarantee the above mentioned effects on Nigeria, neither can it rescue the currency from free fall, at least for now, since China is not the only country Nigeria is trading with and dollar still remains the super-sovereign currency. The only effective solution to stabilize the sinking Naira is adequate diversification of the economy to encourage industrialization, which can enhance exportation rather than continues importation and encouragement of Chinese products through swapization. The paper recommended that there should be road map to develop Nigerian industrial sector with the provision of critical infrastructures and create enabling environment which guarantees ease of doing business, etc. Further studies can be empirically carried out to consider the correlation between the two variables swapization and sinking currency. The variable of swapization can be 132 africanscholarpublications@gmail.com 2021 proxied on liquidity, foreign reserve management, currency fluctuation etc, while the sinking currency can be proxied on exchange rate.

AN ANALYSIS OF FOREIGN EXCHANGE RISK MANAGEMENT AND PROFITABILITY OF DEPOSIT MONEY BANK IN LAGOS, NIGERIA

Article

Full-text available

Jan 2022

Julius Paul Eyanuku

KUR RİSKİ VE KUR RİSKİ YÖNETİMİNİN FİRMA PERFORMANSINA ETKİSİ The Effect of Foreign Exchange Risk and Foreign Exchange Risk Management on Firm Performance

Article

Full-text available

Aug 2021

Gelişen ekonomilerde hem ülke boyutunda hem de firma boyutunda ekonomik ya da finansal büyümenin gerçekleştirilebilmesi için dövize dayalı işlemlere sıkça başvurulduğu bilinen bir gerçektir. Dövize dayalı yapılan işlemlerin sonucu olarak hem ülkeler hem de firmalar kur riski ile karşılaşırlar. Bu çalışmada Metal Eşya, Makine, Elektrikli Cihazlar ve Ulaşım Araçları Sektöründe kur riski ve kur riski yönetiminin firma performansı üzerine etkileri araştırılmaktadır. Çalışmada 2007-2019 yıllarına ait yıllık veriler kullanılmıştır. Yapılan panel veri analizi sonuçlarına göre kur riski ve kur riski yönetiminin firma karlılığını azalttığı buna karşılık firma değerini etkilemediği ortaya çıkmıştır. Çalışmada ayrıca büyüme, likidite, kaldıraç ve aktif devir hızının kur riski ve kur riski yönetiminin belirleyicileri olduğu tespit edilmiştir. Aynı sonuçlara ulaşıldığı için, firmaların kur riski ile kur riski yönetimleri arasında farklılıkların pek olmadığı, yani döviz kurundan kaynaklı riskleri yeterince yönetmedikleri anlaşılmaktadır. Sonuçlar, firma yöneticilerinin kur risklerini daha iyi yönetmeleri gerektiğini göstermektedir. Ayrıca Merkez Bankası ve ekonomi yönetimlerinin döviz kurlarında oynaklığı azaltacak, istikrarı artıracak politikaları uygulamaları önem taşımaktadır. It is a known fact that in emerging economies, foreign exchange-based transactions are frequently used in order to achieve economic or financial growth in both country and firm size. As a result of transactions made based on foreign exchange, both countries and companies face exchange rate risk. It is investigated that the effects of the exchange rate risks and foreign exchange rate risk management on the performance of the firm for the Metal Goods, Machinery, Electrical Equipment and Transportation Vehicles Sector in this study. Yearly data for the years 2007-2019 were used in the study. According to the results of panel data analysis, it has been revealed that exchange rate risk and foreign exchange rate risk management reduce firm profitability but do not affect firm value. It was also found in the study that growth, liquidity, leverage and asset turnover are the determinants of foreign exchange risk and foreign exchange risk management. Because of the same results, it is understood that there is not much difference between the exchange rate risk and foreign exchange risk management of firms, that is, they do not sufficiently manage the risks arising from the exchange rate. The results show that business managers need to better manage foreign exchange risks. In addition, it is important that the Central Bank and economic administrations implement policies that will reduce volatility in foreign exchange rates and increase stability.

Emerging market currency risk exposure: evidence from South Africa

Article

May 2020
J Risk Finance

Purpose The purpose of this paper is to examine the level of foreign exchange exposure of listed nonfinancial firms in South Africa. The study spans the period January 2002 and November 2015. Foreign exchange risk exposure is estimated in relation to the exchange rate of the South African Rand relative to the US$, the Euro, the British Pound and the trade-weighted exchange rate index. Design/methodology/approach The study is based on the augmented-market model of Jorion (1990). The Jorion (1990) is a capital asset pricing model-inspired framework which models share returns as a function of the return on the market index and changes in the exchange rate factor. The market risk factor is meant to discount the effect of macroeconomic factors on share returns, thus isolating the foreign exchange risk factor. In addition, the study further added the size, value, momentum, investment and profitability risk factors in line with the Fama–French three-factor model, Carhart four-factor model and the Fama–French five-factor model to account for the fact that equity capital markets in countries such as South Africa are known to be partially segmented. Findings Foreign exchange risk exposure levels were estimated at more than 40% for all the proxy currencies on the basis of the standard augmented market model. However, after controlling for idiosyncratic factors, through the application of the Fama–French three-factor model, the Carhart four-factor model and the Fama–French five-factor model, exposure levels were found to range between 6.5 and 12%. Research limitations/implications These results indicate the importance of controlling for the effects of idiosyncratic facto0rs in the estimation of foreign exchange risk exposure in the context of emerging markets of Sub-Saharan Africa (SSA). Originality/value This is the first study to apply the Fama–French three-factor model, Carhart four-factor model and the Fama–French five-factor model in the estimation of foreign exchange exposure of nonfinancial firms in the context of a SSA country. These results indicate the importance of controlling for the effects of idiosyncratic factors in the estimation of foreign exchange risk exposure in the context of emerging markets.

A systematic mapping study on risk management in the export development of high-tech products

Article

Oct 2019
JSTPM

Purpose This paper aims to characterize and identify the existing research on risk management in the export development of high-tech products. Design/methodology/approach The authors conducted a systematic mapping study to identify and analyze related literature. The authors identified 96 primary studies, dated from 2000 to 2018 and classified them with respect to research focus, types of research and contribution. Findings A total of 32 studies were identified and mapped, synthesizing the available evidence on risk management in the export development of high-tech products. “Currency risk” with 13 articles is the dominant research focus. Regarding the research type, “Solution proposal” is the most frequently used research type. “Case study”, “Regression analysis” and “Survey”, respectively, were the most used research methods. However, “FANNIS”, “FAHP” and “Discussion paper” were used less often. “Solution proposal” was the most common research type between 2000 and 2018. Further, the number of publications has declined between 2010 and 2012. Originality/value This mapping study provides the first systematic exploration of the state-of-art on risk management research in the export development of high-tech products. The existing body of knowledge is limited to a few high-quality studies.

Interest Rate and Exchange Rate Exposure of Portfolio Stock Returns: Does the Financial Crisis Matter?

Article

Mar 2019

The study examines the impact of changes in interest rate and exchange rates and their unexpected changes on industry and size portfolio returns on the Ghana Stock Exchange (GSE) controlling for the 2007/2008 financial crisis. Three main exchange rates (FX) namely, Ghana cedis (Gh¢)/US dollar, Gh¢/Great Britain Pounds (GBP) and the Gh¢/Euro are used. We use OLS, GARCH and ARIMA in our estimations. The study found that only depreciation of the Gh¢/USD reduces the returns of financial stocks and large firms. There is a direct positive impact of the financial crisis on the returns due to investment shift from developed markets where crisis occurs. Variations in the returns are mostly explained by the market index returns (RM), which has a positive impact. However, we find that the positive impact of RM on the portfolio returns (finance, medium and large portfolios) is reduced during the financial crisis. The results largely reveal that shocks to the conditional variance are highly persistent and the response of volatility decays at a slower rate. Download: https://www.tandfonline.com/eprint/9ud7ziCTeeXkpRdQyB49/full?target=10.1080/15228916.2019.1583977

Effect of Contemporaneous Exchange Rate Changes on Value of Multinational Nonfinancial Companies Listed at Nairobi Securities Exchange

Article

Full-text available

Jul 2018

The study investigates the effect of contemporaneous exchange rate changes on value of multinational nonfinancial companies listed at Nairobi Securities Exchange for period 2001-2016. Unexpected exchange rate changes and lagged exchange rate movements were used as control variables. The study adopted a two staged methodology. The first stage involved the determination of the foreign exchange exposure. At this point the REER is determined as the weighted average of the seven major currencies used by Kenya. The unexpected foreign exchange changes were determined using the ARIMA and GARCH model. The second stage of analysis involves a panel model where different aspects of foreign exchange exposure are regressed on firm value. The results indicated that contemporaneous exchange rate changes have a negative significant influence on the value of nonfinancial companies listed at the Nairobi Securities Exchange. The results of the study were inconclusive on the effects of lagged changes in exchange rates on firm value. The findings of the study reveal that unexpected exchange rate changes have a significant negative influence on firm value.

Impact of Risk Administration in Rural Banks in Ghana

Article

Full-text available

Jun 2016

Nsiah Richard

The ability of banks to formulate and adhere to policies and procedures that promote credit quality and curtail non-performing loans is the means to survive in the stiff competition. Inability to create and build up quality loans and credit worthy customers leads to default risk and bankruptcy as well as hampers economic growth of a country. However, little work is done to search the ways and means that enable to quality loan creation and growth as well as to determine the relationship between the theories, concepts and credit policies both at country or regional level. For the purpose of the study both primary and secondary data are used. Primary data is collected using semi structured questionnaires. The secondary data is collected from annual reports, directives, and bulletins of the bank. Descriptive statistical tools are used in analyzing the data collected. Hence, the nature of the Study is descriptive. Finally, based on the findings possible recommendations are given. These include the issues impeding loan growth and rising loan clients complaint on the bank regarding the valuing of properties offered for collateral, lengthy of loan processing, amount of loan processed and approved, loan period, and discretionary limits affecting the performance of credit management.

A Study on Financial Risk Management Practices of Selected I.T. Companies in India

Article

Full-text available

Mar 2017

Risk management has become a key factor in assessing the future performance and effectiveness of management. Now a days many companies deal with foreign players, and receive its return in multiple currencies. They face foreign exchange risk because of sudden&drastic changes in exchange rates, which may cause significantly damaging financial losses from otherwise profitable export sales. Information Technology Company faces this risk higher because major share of its income comes from foreign countries in foreign currencies. It is now important to know: what the status of Indian I.T. companies is, in regards to foreign exposure, what are the instruments they are using for risk minimization, what are the recent statistics of its profit/loss due to Forex transactions and what is the resultant impact on its profitability? This research paper focuses on how selected I. T. companies in India manage their financial risk, who has the authority to establish financial risk management in selected I. T. companies, the ways adopted to support financial risk management policy, preference given to the approaches for dealing with risk, types of financial risks managed, model preferred for measuring credit risk, market risk&operational risk, types of derivative instruments used & resultant impact of financial risk management practices on the overall value&net profit of selected large scale I. T. companies.

ANALISIS RISIKO INVESTASI PABRIK BARU DENGAN SIMULASI MONTE CARLO

Article

I. Ketut Gunarta

A case study of an investment in developing a new factory was conducted to analyses one of critical factors which are concern in foreign investment evaluation, such as the exchange rate of US$ to IDR (Rupiah). The exchange rate's fluctuation has potential effect on the financial engineering project and also the firm performance, where as the investment was funded by export debt. The exchange rate risk was analysed by Monte Carlo simulation model.

Methods of payment and foreign-exchange risk management among firms in Brunei Darussalam

Article

Aug 2009
J Risk Finance

Rajeshwar Sirpal

Purpose – The purpose of this paper is to examine various methods of payment and foreign-exchange risk management among firms involved in either export or import trade only, or both in Brunei Darussalam. The paper also seeks to delineate the relationship(s) between various characteristics of firms such as number of years in business, size, and frequency of imports, and various methods of payment and foreign-exchange risk management by the firms. Design/methodology/approach – Judgment and snowball sampling methods are employed to collect data from the companies. The results are analyzed from a total sample of 42 responding firms. Descriptive statistics is used to present and analyze the data. Findings – The paper highlights the various important methods currently used for both payment, and foreign-exchange risk management in foreign trade by firms. It also mentions the methods that are used to lesser extent by importers and exporters in the country. Furthermore, various relationship(s) between either number of years in business, or size, or frequency of imports with various methods of payment, and foreign-exchange risk management among firms are also highlighted in the paper. Research limitations/implications – The results are basically from the various trading companies involved in foreign trade in Brunei Darussalam. Originality/value – This paper contributes to the existing literature of international business and finance. It fills the gap in the existing literature about current practices prevalent in the country. Furthermore, recommendations are made to enhance the methods of payment and foreign-exchange risk management practices among firms. The findings may also be useful for financial institutions interested in providing hedging products and services to the firms.

A global perspective on the use of derivatives for corporate risk management decisions

Article

Mar 2000
Manag Finance

Notes the “spectacular” growth of derivatives over the last 20 years and reviews previous research on the risk management policies and practices of corporations. Reports a survey of leading, non-financial Canadian firms and compares it with previous studies. Shows the differences between respondents using/not using derivatives, the proportions of different types of treasury organization, the importance attached to treasury benchmarking and the integration of risk management policy with strategic plans. Finds that Canada uses derivatives more than Europe or the USA; that most Canadian and European treasuries operate as cost or service centres but are not benchmarked; that although most Canadian and European companies have written risk management policies, these are not integrated with financial/operating plans; that US risk managers are more likely to take positions reflecting their market views; and that in all the countries covered derivative users are larger than non-users. Believes that most risk management programmes “remain in an introductory stage”.

Foreign Exchange Risk Management Practices and Products Used by Australian Firms

Article

Full-text available

Feb 1993
J INT BUS STUD

This industry-wide, cross-sectional study concentrates on recent foreign exchange risk management practice and product usage of large Australian-based firms. Results are discussed from an empirical field study of seventy-two firms operating in Australia. Based on a statistical analysis of five firm-specific variables with six management-practice variables, conclusions are drawn on the foreign exchange risk management practices and financial product usage of firms operating in Australia.© 1993 JIBS. Journal of International Business Studies (1993) 24, 557–573

Foreign exchange exposure:An overview

Article

Nov 2011

Foreign exchange exposure represents a material risk for multinational corporations which are unrelated to business operations. One needs to identify each foreign exchange exposure, the risk it represents and methods and costs available to limit such exposure. This paper discusses the three major types of foreign exchange exposure: translation, transaction and economic: the available economic and financial available resources to limit and/or eliminate such exposure and the cost, if any, associated with each strategy. With global business on the rise, foreign exchange exposure must be addresses and its impact on worldwide economies will continue to increase.

International Business: Competing in the Global Market Place

Article

Aug 2008
Strat Dir

Charles William Leslie Hill

Foreign Exchange Risk

Article

Dec 1978

Multinational Financial Management.

Article

Dec 1983

Risk Management and Insurance

Book

Jan 2004

Cost Effectiveness of Risk Management Practices

Article

Sep 1990

Despite the increasing importance of risk management in a successful business organization, virtually no research has been undertaken to evaluate the effectiveness of various risk management practices. Through analysis of data obtained from a survey of risk management professionals, such an evaluation has been made and is reported here. Results include the expected effects of lower costs associated with higher levels of retention, increased size, and less risky industries. The relationship of higher costs with the use of a captive, and the ineffectiveness of centralization or use of analytical tools were unexpected.

Research Trends and Gaps in International Financial Management: A Note

Article

Jan 1989

Strategic Management of Exchange Rate Risks

Article

Aug 1990
LONG RANGE PLANN

Martin Glaum

Highly volatile foreign exchange markets have forced corporate managers and academics alike to pay more attention to the management of foreign exchange risk. However, with only a few exceptions, both business practice and the relevant academic literature concentrate solely on the short term, tactical aspects of foreign exchange risk management. This article emphasizes the strategic nature of foreign exchange risk. The concept of economic exposure is accepted as the appropriate basis for corporate exchange risk management. From this concept, the author argues that it follows conclusively that exchange risk is a strategic factor in a company's competitive environment. As such it requires a strategic management approach: exchange risk management should be incorporated into the long range, strategic planning system of the corporation, and it should be integrated with all areas of corporate decision making.

Conventional Hedging: An Inadequate Response to Long-Term Foreign Exchange Exposure

Article

Dec 1991
Manag Finance

Since the demise of the Bretton Woods System of quasi-fixed exchange rates in the early seventies, unanticipated exchange rate movements are a fundamental feature of the international economic environment. The ever increasing degree of exchange rates volatility has spurred the creation of new financing and hedging instruments and techniques. The proliferation of these financial innovations has confounded many treasurers as to the appropriate instrument or technique to be used in resolving a foreign exchange risk management problem. Notwithstanding the persistent and sophisticated nature of current foreign exchange risk management, there are situations where hedging does not protect the firm from large losses caused by unanticipated changes in exchange rates. We present three situations where hedging fails to protect the firm from risks arising from fluctuating exchange rates: first, where the firm has a continuous inflow of foreign currency; second, where foreign exchange risks are compounded by general and relative price risks; and third, where the perfectly hedged firm faces competition from unhedged rivals.

Risk management practices of German firms

Article

Mar 2000
Manag Finance

Identifies some gaps in corporate risk management research and presents a study of risk management practices in large, non-financial German firms. Compares the perceived relevance of different types of risk with the intensity of their management and reports that no respondents admitted major difficulty in developing a risk management system. Finds that firm survival is rated as the top goal of risk management, that respondents are closer to risk-neutral than risk-averse for financial risks, that around half centralize treasury management and 88 per cent use derivatives. Ranks the types of derivatives used and the importance of associated problems; shows how foreign exchange risk, US $ exposure and interest rate risk are managed; and assesses attitudes towards foreign exchange and interest rate risk management. Considers consistency with other research and calls for more.

Managing strategic exchange rate exposures: Evidence from UK firms

Article

Nov 2002
Manag Finance

The effect of exchange rate movements on firm value is important to firms engaged in international transactions. These accounting exposures can be managed using financial instruments. However, the competitive or strategic effects that create economic exposure require firms to adopt a strategic approach. This paper reports on the extent to which large, publicly-listed UK firms adopt a strategic approach to the management of exchange rate risk. Unlike earlier studies, the results indicate the widespread use of a range of operational hedging techniques. A significant proportion of firms are also found to incorporate currency risk management as a factor in decisions made by their operating departments. However, the study also indicated considerable variation in the application of operational techniques between firms and industry sectors.

Foreign Exchange Risk Management: Evidence from Finland

Article

Dec 1997
Manag Finance

This study investigates foreign exchange risk management in major Finnish firms. The shift to a floating foreign-exchange regime has increased risk aversion and intensified risk management in a number of firms. The managers feel they can forecast foreign exchange development, and that they have been successful in risk management. Managers pay attention to economic exposure, and instead of being closed out, the foreign exchange exposures are managed actively. The transaction risk of both agreed-upon flows and budgeted items are hedged. Accounting exposures are also managed extensively.

A global perspective on the use of derivatives for corporate risk management decisions

Article

Mar 2000
Manag Finance

International working capital practices in the UK

Article

Mar 2000
EUR FINANC MANAG

This paper reports the results of a survey on the international working capital management practices of the top 200 companies in the United Kingdom. The purpose of the survey was to obtain information on some international aspects of working capital management in major British firms.

Foreign Exchange risk management

Article

Peter Anderson

Survey Research Methods

Article

Jan 1993

Floyd J Fowler

Incl. bibliographical references, index, exercises

Multinational Financial Managment

Article

Jan 2013

Alan C. Shapiro

Enviroment of international financial mangement -- Foreign exchange and derivatives markets -- Foreign exchange risk management -- Financing the multinational corporation -- Foreign invesment analysis -- Multinational working capital management

Risk Management and Insurance

Article

Jan 1995

Sumario: What is risk? -- The risk management process -- Risk management: property and liability exposures -- Risk management: life, health, and income exposures -- The risk management environment

Hedging foreign exchange operating exposure /

Article

Richard A. Gluck

Thesis (M.S.)--Massachusetts Institute of Technology, Sloan School of Management, 1984. Supervised by Donald R. Lessard. Includes bibliographical references (leaves 67-68).

International Financial Management / J. Madura.

Article

Jan 2003

Jeff Madura

Esta esla tercera edición en inglés publicada en 1992. Contiene: el ambiente financiero internacional; comporamiento del tipo de cambio; administración del riesgo del tipo de cambio; Administración de los activos y pasivos a largo plazo; administración de activos y pasivos a corto plazo.

Payments Netting in International Cash Management

Article

Jun 1978
J INT BUS STUD

Alan C. Shapiro

Global production rationalization typically leads to a heavy volume of intercompany fund flows. By transferring only a netted amount of these payments, significant savings can be realized in the form of reduced foreign exchange spreads, float, and other transaction costs. However, if this netting is done by paper and pencil, opportunities to reduce transfer costs may be missed, especially where there is a complex pattern of cross-border transactions. The purpose of the paper is to show how mathematical programming can be used to design a netting system capable of minimizing the total costs involved in setting interaffiliate accounts.© 1978 JIBS. Journal of International Business Studies (1978) 9, 51–58

Management of Foreign Exchange Risk: A Review Article

Article

Mar 1981
J INT BUS STUD

Laurent Jacque

This paper reviews the literature on Foreign Exchange Risk Management (FERM) which has burgeoned during the last decade. Scholars' and practioners' emerging interest in Foreign Exchange Risk Management was spurred by the advent of fluctuating exchange rates in the early seventies as well as by the pronouncement of the infamous FASB Statement No. 8 in 1976 which laid down unambiguous guidelines for consolidating financial statements of multinational corporations. A normative (rather than a market) view of Foreign Exchange Risk Management is taken and accordingly the author reviews first the two key informational inputs necessary for any Foreign Exchange Risk Management program: forecasting exchange rates and measuring exposure to exchange risk. Available decision models for handling transaction and translation exposures are reviewed next. A concluding section identifies gaps in the existing literature and suggests directions for future research.© 1981 JIBS. Journal of International Business Studies (1981) 12, 81–101

The renaissance of netting”

R J Bogusz

International Finance

Jan 1993

E Clark
M Levasseur
P. Rousseau

Exporters can choose different terms of sale

M C Dennis

Understanding cross-currency swaps

J S Evans
D K Malhotra

Wechselkursrisiko-management in deutschen inter-nationalen unternehmungen”

M Glaum
A Roth

How Is Foreign Exchange Risk Managed? An Empirical Study Applied to Two Swiss Companies

V Popov
Y Stutzmann

Financial Markets and Institutions: A Managerial Approach

Jan 1993

K.J. Tygerson

International working capital practices of the Fortune

C Ricci
G Morrison

Managing foreign exchange risk among Ghanaian firms

Abstract

No full-text available

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