A survey on the foreign exchange risk management practices of Kenyan based subsidiaries of multinational corporations

Abstract

Managing foreign exchange risk is a fundamental component in the safe and sound management of all institutions that have exposures in foreign currencies. It involves prudently managing foreign currency positions in order to control, within set parameters, the impact of changes in exchange rates on the financial position of the institution. Foreign exchange risk can be managed in various ways, the risk manager's choice of the different types of techniques may, however, be influenced by costs, taxes, effects on accounting conventions and regulation. The process involves identification, measurement, and management of the risk. The economic environment in which firms operate is highly volatile and unpredictable increased volatility, greater interdependence and new risks have made the structure of risk exposure of multinational corporations especially of financial institutions more complex. The volatility of foreign exchange rates and interest rates has been increasing significantly thus the necessity to have action plans to hedge the risk exposures. The research study objective was to determine the extent of use of foreign exchange risk management practices by Kenyan based subsidiaries of MNCs. The study is a descriptive survey. The population of this study consisted of the 30 Kenyan based subsidiaries of MNCs from four industries, which are greatly affected by foreign exchange risk. The researcher concludes that foreign exchange risk is an important aspect used by multinationals to ensure a safe and sound management of all institutions as they are exposed to foreign exchange risk. Companies have departments and policies on risk management that helps them minimize exchange losses, reduce volatility of cash flows and protect earnings fluctuations . They are still faced by various problems in managing risks like frequent increase in exchange rates and getting the needed foreign currency. To solve them various hedging instruments are used to manage these exposures through the risk sharing, matching and diversification strategies. The recommendations are that the risk management department in an organization hence very important for multinationals. Policies should be made to govern the decisions to be made on the exchange rates so as to ensure that efficient diversified strategies are put in place to minimize any risk exposure.