Abstract: Modern finance and economics has been concerned with the effects of changes in exchange rates on returns and cash flow of corporations. After the collapse of the Bretton Woods System in the mid-1970s, most corporations throughout the world viewed exchange rates as significant risk factor. This is especially the case in those industries that have been subject to substantial globalization. Firms who transact in foreign currencies in the course of carrying out their businesses inevitably get exposure to foreign exchange rate risk. Firms are increasingly operating across borders; exporting and importing raw materials and finished goods, employing foreign capital, people and processes and controlling their resources globally–thus the importance of currency fluctuations. Exchange rate risk can be broadly defined as the risk that a company’s financial performance will be affected by exchange rate movements. Measuring and managing exchange rate risk exposure is critical in reducing a firm’s vulnerability from major exchange rate movements, which could adversely affect profit margins and the value of net assets. The purpose of this study was to evaluate the effect of exchange rate exposure on a company’s financial performance through a survey of listed companies in the Rwanda Stock Exchange that covered the period of 3 years 2012 to 2015. The research adopted descriptive research design which involved the use of both qualitative and quantitative data. A census approach was used on the eight firms listed in Rwanda stock exchange. The research utilized questionnaires for data collection comprising of structured questions. Data was collected from primary and secondary sources. Primary source was from senior managers in finance using questionnaires. Both descriptive and inferential research methods was used to analyze data collected. Descriptive statistics included frequencies, percentages, measure of central tendency, range, variance and standard deviations. Inferential statistic included correlation analysis. While analytical tool to be used included Statistical Packages for Social sciences version 21 (SPSS) and presented using charts and tables. From the findings the study found that listed firms financial performance is affected by the foreign exchange rates movements. Use the income statement and the owner ‘s equity account to record foreign exchange differences. The study further concluded that unrealized foreign exchange gains/losses had an effect on the Net Income of listed companies as it was posted to either income statement or owners’ equity. The study therefore concludes that foreign exchange affects the company’s financial performance through, imports and accounts payables and export sales and accounts receivables thus with the net effect on the Net Income of multinational companies through the income statement or the owners’ equity reserves. From the findings of this research, the study recommends that firms listed in the Rwanda Stock Exchange should explore avenues to enhance capacities within firms for managing foreign currency risk. Future researcher may conduct further studies and identify other macro-economic factors that significantly affect a firm’s financial performance.
Keywords: Transaction based foreign exchange exposure, Financial performance, financial performance of listed firms in Rwanda.
Title: EFFECT OF FOREIGN EXCHANGE EXPOSURE ON A FIRM’S FINANCIAL PERFORMANCE: A CASE OF LISTED COMPANIES IN RWANDA
Author: JAMES JOSEPH OGATO, Dr. PATRICK MULYUNGI, Dr. JAYA SHUKLA
International Journal of Management and Commerce Innovations
ISSN 2348-7585 (Online)
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