A SURVEY OF THE FOREIGN EXCHANGE RATE RISK MANAGEMENT PRACTICES IN THE ENERGY SECTOR OF KENYA

Abstract

This paper investigates foreign exchange rate risk management practices among Kenyan firms in
the energy sector. The study focuses on how Kenyan energy sector firms manage their foreign
exchange risk and the challenges they face in managing exchange rate exposure. It also seeks to
ascertain the extent to which these firms use foreign exchange rate risk management techniques.
The results indicate that most of the firms in the energy sector in Kenya do have formal
documented foreign exchange rate risk management systems which are also embedded in the
overall company strategic plans. However, the firms exhibited a low-level use of hedging
techniques. For firms which use hedging techniques, forwards and currency swaps are the most
used instruments, and transaction exposure is the most managed exchange rate risk. Translation
and economic exposure are not well identified and managed mainly because firms believe it is
unnecessary or rather too complex. Further, firms hedge their exposure but not fully due to high
cost of hedging.
The main value of this study is the analysis of foreign exchange exposure management from a
Kenyan perspective. Relevant recommendations aimed at enhancing the foreign exchange rate
risk management practices among Kenyan energy sector firms are made. The study is useful not
only to the policy makers, entrepreneurs in the energy sector and academicians, but also to
financial institutions interested in providing hedging products to these firms