The Effect of Risk Management Instruments on Foreign Exchange Exposure by Unit Trust Companies in Kenya

Abstract

The main objective of the study was to find out the effects of risk management instruments on foreign exchange exposure by unit trusts companies in Kenya. The research design was descriptive which involved the use of quantitative data. The sample size constituted of 47 firms that were registered with capital markets authority of Kenya and trading in unit trusts. Results of 43 firms were analysed after eliminating questionnaires that were not filled by the respondents, spoilt and inconsistent questionnaires. The research utilized questionnaires for data collection comprising of structured questions. In analyzing the responses, Statistical Package for Social Sciences (SPSS Version 20) was used. This generated descriptive statistics such as percentages, frequency distribution, measures of central tendency and graphical expressions. The study found that firms use local currencies in doing their business and this exposes them to foreign exchange risks because all the major hard currencies of international transaction are sources of foreign exchange risk. This further increases the risk because developing countries like Kenya have less developed financial systems. The study also found out that firms invoice foreign currency as internal/ natural risk management technique and currency swaps as external technique to mitigate foreign exposure. The study concluded that as found out in this study, the exchange rate risk faced by firms formed a significant component of their risk profile. It is important that firms trading in unit trusts effectively manage their risk to minimize their exposure to exchange rate risk. These risks occur as a result of changes occurring in local and global financial cycles.