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Determining the Optimum Strategy for Hedging Transaction Exposure: An Empirical Study in Internationally Active Companies in Rwanda

Jonas BARAYANDEMA

Abstract


Internationally active companies possess a multitude of cash flows that are sensitive to changes in exchange rates, interest rates, and commodity prices. These three financial price risks are subject of the growing field of financial risk management. Hedging is one of the methods which allow such companies to reduce their financial exposure.

Based on theory of hedging (Wei, 1999; Smith and Stulz, 1985), taking into account that reduction of cash flows is not sufficient reason for currency risk management (Froot K., 1993), this paper attempts to provide useful insights and predictions on the firm's hedging decision; and suggests hedging strategies to Rwandan companies.

As Rwanda is entering in open economy and that a capital market is set up, this paper, by an empirical study, analyzes how internationally active companies manage transaction risk, and attempts to determine the optimum strategy for hedging such exposure. In other words, the study find answers to the following questions:
- To what extent internally active companies located in Rwanda are subject to transaction exposure?
- What is the optimum strategy for hedging transaction exposure for Rwandan companies?
A novelty of this paper is a survey of actual risk management and techniques used by internationally active companies located in Rwanda, to manage their financial exposure. It also suggests optimum strategy that may be used by Rwandan companies operating internationally.

Keywords


Exchange rate, Foreign exchange exposure, Transaction exposure, Translation exposure, operating exposure, hedging,

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