The relationship between foreign exchange rate volatility and value of multinational firms listed at Nairobi Securities Exchange

Abstract

Realized volatility is a measure of actual price volatility, based on past prices over a given time period. It is often called historical volatility or historical deviation. Realized volatility stands in contrast to implied volatility, which is based on expectations of future price movement. Realized volatility can be calculated and expressed in different ways, such as in terms of indexes Kenya like many other developing countries has adopted a floating rate regime, which means that the price of the Kenya Shilling (Kshs.) with respect to other currencies is set by market forces of demand and supply. As per multinational firms listed in the NSE’s foreign exchange trading activities audit, the main drivers responsible for the increase in the level of activities during this period were identified as “reverse carry” deals, shortening of the tenor of currency swaps, the preference by Kenyans to hold their wealth in foreign currency and the use of Electronic Brokerage System (EBS) for foreign exchange trading. The study findings showed that there was high volatility in foreign exchange rate within the first quarters. The volatility reduced, almost evened out between the second and third quarter of the year before increasing in the beginning of the third quarter.An increase in the variance of the permanent(transitory) component in the exchange rate process leads to greater variabilityin the growth rate of the firm’s profits, thus establishing affecting the value leading to the conclusion that exchange rate volatility matters in firms’ value variations. The recommend that the Government should consider using information technology infrastructure to provide information on exchange rate to the wider public in order to improve the information efficiency thus enable firms’ management make informed decisions as such volatility affect their value