Determinants of Hedging Foreign Currency Risk in Kenya: A Survey of Tea Exporting Companies in Mombasa County

Abstract

: This research project sought to establish the factors affecting the decision to hedge foreign currency risk in Kenya with a focus on tea exporting companies in Mombasa County. The general objective was to establish the determinants of hedging foreign currency risk. The independent variables under consideration were: firm size, firm liquidity, degree of leverage and the cost of hedging. These independent variables created the basis for the specific objectives under review as follows: to find out how the firm size influences the decision to hedge foreign currency risk; to establish how the degree of financial leverage influences the decision of firms to hedge foreign currency risk; to find out how firm liquidity affects the decision to hedge foreign currency risk; and to find out how the cost of hedging influences the decision to hedge foreign currency risk. The theories under review in this research were the interest rate parity theory that was developed by Keynes in 1930 and it applies the law of one price. The other theory under review was the international Fisher effect theory that states that differences in interest rates in different markets can cause a flow of funds from markets with low interest rates to markets with high interest rates. A descriptive research design was used in this research. The target population was 42 tea exporting companies in Mombasa and a random sample of 10 companies was drawn from the 42 companies. The research findings were that the cost of hedging is the major factor affecting the decision to hedge while the size of the firm and firm liquidity also had an above average influence on the decision to hedge. The degree of leverage by the firm had the least impact on the decision to hedge since most of these tea exporting companies are not highly leveraged.