Impact of foreign exchange rate movements on company profitability in the tobacco sector. A case study of the British American Tobacco Kenya limited
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Date
2020
Authors
Darshna, Dinesh Kurji Patel
Journal Title
Journal ISSN
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Publisher
Strathmore University
Abstract
Any firm engaging in international trade is exposed to exchange rate risk, whether translation,
transaction or economic risk. Knowing the impact or its extent can help t1rms evaluate potential
positions they can take in the forex market to hedge their exposures. This study examines the
impact of movements in exchange rates on profitability of firms in the tobacco industry in Kenya,
specifically looking at a case of BAT Kenya. This study explores the impact on profitability by
employing a V AR Model from the period of 1995 to 2018. Profitability is looked at in terms of
three measures: Return on Equity (ROE), Return on Assets (ROA) and Return on Invested Capital
(ROIC) and the main exchange rates incorporated in the study are the USD, Euro and the GBP.
The main idea behind using a V AR Model was due to its characteristics of obtaining impulse
responses which are highly beneficial for governments when formulating monetary policies that
are also dependent on exchange rates. Findings of the study reveal statistical significance of the
exchange rates, bit different for different exchange rates. Additionally, shocks in the exchange
rates are highly likely to impact corporate profitability and therefore firms operating in
internationai trade are likely to experience exchange rate exposure and therefore these results are
highly beneficial for them. A major limitation ofthe study is the inadequacy of enough data points.
Due to lhe dynamic macro environmeui: that the exehange rates are exposed to, there is yet a grcnt
room for research considering the many major exchange rates that affect any finn's cash flows.
Description
Submitted in partial fulfilment of the requirements for the Degree of Bachelors of Business
Science in Finance at Strathmore University