Open Access Open Access  Restricted Access Subscription or Fee Access

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,

Full Text:

PDF


Disclaimer/Regarding indexing issue:

We have provided the online access of all issues and papers to the indexing agencies (as given on journal web site). It’s depend on indexing agencies when, how and what manner they can index or not. Hence, we like to inform that on the basis of earlier indexing, we can’t predict the today or future indexing policy of third party (i.e. indexing agencies) as they have right to discontinue any journal at any time without prior information to the journal. So, please neither sends any question nor expects any answer from us on the behalf of third party i.e. indexing agencies.Hence, we will not issue any certificate or letter for indexing issue. Our role is just to provide the online access to them. So we do properly this and one can visit indexing agencies website to get the authentic information. Also: DOI is paid service which provided by a third party. We never mentioned that we go for this for our any journal. However, journal have no objection if author go directly for this paid DOI service.