Effects of Hedging Foreign Exchange Risk on Financial Performance of Non-Banking Companies Listed at the Nairobi Securities Exchange

Abstract

The general objective of this study was to establish the effects of
hedging foreign exchange risk on financial performance of non-banking
companies listed at the Nairobi securities exchange. A descriptive research
design was adopted on the target population of 49 non-banking firms listed at
the NSE. Primary data collected using a questionnaire was used containing
both open and close ended questions. Data was analyzed using SPSS to
generate descriptive statistics such as percentages, frequency distribution,
measures of central tendencies (mean) and the data was presented in tables.
The study conducted multiple regression analysis to establish the extent to
which the hedging techniques affected firm’s performance. The results
showed that, taking all factors into account (internal hedging techniques,
external hedging technique, inflation and interest rates) performance of nonfinancial
firms would be 0.564. The findings presented further indicated that
internal hedging had the greatest effect on the firm performance (β = 0.551),
Inflation (β = 0.322), External hedging (β = 0.133 while interest rate (β =
0.024) had the least effect to the firms performance. However, all the
variables were significant (p<0.05). Hedging techniques affected firm’s
performance i.e. profitability, sales revenue and the cash flow and liquidity
position of the firm. The internal techniques were more effective on the
performance than the external techniques. The four independent variables
studied accounted for 75.5% of the variations in non-banking firms’
performance as represented by the adjusted R2. This therefore means the four
variables contribute to 75.5% of performance, while other factors not studied
in this research contributes 24.5%. The study recommends that, firms
develop a robust foreign exchange risk management framework which
clearly shows its currency risk assessment procedure and implementation of 

currency risk management strategies. It also recommends that the various
aspects of firm’s financial performance be taken into consideration before
adopting a particular technique to hedge to protect cash flow, liquidity,
profitability and sales revenue.