Abstract:
The study was conducted in Arusha Tanzania between August 2011 and May 2012. The main objective was to assess foreign exchange risk management process for Davis & Shirtliff Company Limited. Data were collected from a respondent among the company officials and from the company records.
The results show that fluctuations in exchange rates have huge effect on company’s cash flow when doing business operations dominated by foreign currency. To that effect, the company manages its foreign exchange risk through use of invoicing currency as a hedging technique to curb the risk arising from foreign exchange rate fluctuations.
Furthermore the study revealed that although there are different tools and techniques such as exposure netting, cash pooling, lead and lagging, the company use invoicing currency as the sole technique for managing foreign exchange risk. It was also revealed that, the management of foreign exchange risk of the company is done internally by officials responsible for monitoring all the risks in a particular currency during trading.
Findings from this study are expected to broaden the existing knowledge on management of foreign exchange risk by Davis & Shirtliff Company Limited as well as other similar companies while employing invoicing currency as the only technique. This will provide quick ideas on the use of such technique and where possible establish the need to use other techniques and tools at the same time.
The study recommends some aspects that need to be looked into: First, the need for the company to study other hedging techniques that can be helpful to it in managing foreign exchange exposure in all directions of trading. Second, the need to outsource to the financial institutions such as a bank, company’s foreign exchange risk management task since the bank has the fast track information on foreign currency trading.
