Hedging foreign exchange rate risk using currency futures: A case of Kenyan multinational firms

Abstract

Currency futures contracts can be used in hedging exchange rate risk for firms. This study estimates the appropriate futures price that Kenyan multinational firms would have used during the year 2015 when the Kenya Shilling depreciated significantly relative to the US Dollar. The study also estimates the optimal hedge ratio for the two futures contracts based on simulated futures prices from historical exchange rates. The firms included in the sample are; NIC Bank, Britam, Equity Holdings, KCB Bank Group and Jubilee Holdings. The countries considered for the subsidiaries of these firms are Tanzania and Uganda. The results from the study reveal that the futures contract would have helped minimize the losses incurred by these firms during that period since the futures price at the beginning of the year is less than the spot exchange rate at the end of the year which the firms use to translate their financial statements. The hedging strategy using the futures contracts is also seen to be effective based on the R-squared values from the Ordinary Least Squares method used to obtain the optimal hedge ratios.