The effectiveness of financial derivatives in managing foreign exchange exposure among commercial banks listed at the Nairobi Securities Exchange

Abstract

This study was conducted with the aim of establishing the effectiveness of derivatives in managing foreign exchange exposure among commercial banks in Kenya. The study adopted a descriptive research design. The population of the study constituted all 10 listed commercial banks that were in operation during the study period from January, 2008 to December, 2012. A census of the population was conducted. Analysis was conducted through the use of regression analysis. The results indicated that derivative usage was found to have a negative relationship with foreign exchange exposure meaning that an increase in derivative usage resulted in a corresponding decrease in foreign exchange exposure. The relationship was in addition found to be significant as indicated by the p-value (0.0357>.05). The study consequently concluded that there was a negative, significant relationship between derivative usage and foreign exchange exposure for banks’ listed in the NSE. Consequently, therefore, derivative usage was found to be effective in management of foreign exchange exposure. On the basis of the findings, the study recommended that since derivative usage and foreign currency exposure are significantly and negatively related, derivatives can effectively be used by banks in Kenya to manage foreign exchange exposure.