Strategies Adopted by Firms in the Management of Foreign Exchange Rate Risk in the Export Processing Zone in Athi River, Kenya

Abstract

Foreign exchange risk has become a more important component of risk management in light of the globalization and internationalization of world markets following increased exposure of firms engaged in international trade. The objective of this study was to establish the strategies adopted by firms in the Export Processing Zone in Athi River to manage foreign exchange rate risk. The specific objectives included establishing the strategies adopted by firms in the Export Processing Zone in Athi River in the management of foreign exchange rate risk and determining effectiveness of the foreign exchange rate risk management strategies adopted by firms in the Export Processing Zone in Athi River in the management of foreign exchange rate risk. This study adopted a descriptive, cross-sectional research design. The target population of the study comprised 45 firms registered at the EPZ Athi River. The study used primary data collected using a questionnaire. The collected questionnaires were inspected for completeness and entered into data analysis software. From the findings, the firms in the export processing zones use various strategies to manage foreign exchange risk exposure, forward contract in foreign currency the and enter into a contract to sell/purchase a set amount of foreign currency at the predetermined price in a given future date, spot rate that allows them to manage foreign exchange fluctuations and also use spot rate existing on the day of transaction for majority of our foreign currency transaction. The study recommends that firms in the export processing zones need to employ risk management policies aimed at reduction of bankruptcy and distress costs, reduction in expected tax payments, reduction in expected payments to stakeholders and reduction in cost of raising funds.