ProjectClue.com WhatsApp or Call Us

projectclue whatsapp icon07030248044

Project Topic:

FOREIGN EXCHANGE RISK MANAGEMENT IN NIGERIA ECONOMY AND ITS IMPACT ON PROFITS OF BANKS

Project Information:

 Format: MS WORD ::   Chapters: 1-5 ::   Pages: 60 ::   Attributes: Questionnaire, Data Analysis,Abstract  ::   5,329 people found this useful

Project Department:

ECONOMICS UNDERGRADUATE PROJECT TOPICS, RESEARCH WORKS AND MATERIALS

Project Body:

CHAPTER TWO

LITERATURE REVIEW

Management of risk is one of the essences of the business of banking. The extent to which risk management is being managed or controlled could either be said to be an art or science.

 Indeed a judicious mixture of both could form the subject of an interesting if inconclusive debate (Richard, 2008). These would however surely be little argument as to whether or not risk taking and risk management in banking require the deployment of special skills and judgment for it is in this field that banking ability of the individual or of the organization is most critically tested.

 It is therefore in view of the foregoing that bankers actually understand the very nature of foreign exchange risks, the methods of analyzing them. The various types of risks involved and ways of mitigating these risks. These and other aspect of foreign exchange risks form the various subsection of this chapter.

2.2 Foreign Exchange Risk Defined

 Before delving into the mechanics of foreign exchange risk management, it is pertinent to attempt a definition of the term. Foreign exchange risk or currency risk exposure as some authors prefers to call risk associated with in fluctuations in currencies, has been defined severally by different authors. One thing that is glaring is the lack of consensus on what the term actually connotes.

 Books on this subject used a number of expressions lime economic transaction, accounting transaction, balance sheet exposure but they do not define them in the same way and very few authors have set out vigorous or formal definitions.

 Derosa (1991), foreign exchange risk can be defined as the potential transaction, translation gains and losses when foreign investments are valued in terms of the investors home currency”

 Shapiro (1996) also advanced a simplistic definition when be defined exchange risk as the variability in the value of the firm that is caused by uncertain exchange rate changes.

 Thus, exchange risk is viewed as the possibility that currency fluctuations can alter expected amounts or variability of the firms’ future cash flows.

 Walker (2007) says that” an assets liability or income stream  is exposed to exchange risk when a currency movement will change, for better of for worse, its parent currency value” he were on to define accounting exposure as “ the possibility that these foreign currency.

 Denominated items which are consolidated into a company’s published financial statement will show translation loss (or gain) as a result of currency movement since the previous balance sheet date” he also defines economic exposure as the possibility that the parent currency denominated net present value of foreign subsidiary’s cash flows will be adversely affected by exchange rate movement”

 Kenyon (1984) referred to foreign exchange risk as economic currency risk which he defined as the risk that a sustained real use of a currency against the currencies of competitors will adversely affect a company’s competitive costs and therefore its sales, profit margins and market share, which in turn will reduce the return on the capital and revenue investment previously sunk in its present commercial activity and the present value of the investment.

 From the foregoing, despite the difference in expressions and language used, it can be established the foreign exchanged risk reference to the uncertainly surrounding variations in the value of other currencies as compared to a local currency and the effect of such risks on both the value of the company and its cash flow.

 2.3 Why Do Firms Deal in Foreign exchange?

 It has been argued on many occasions that the simplest way to avoid foreign exchange risk is not to have the risk in the first place. This means the company/bank will trade and sell in the currency of cost and by financial all assets by debts in the same currency

 However, this is not to be as many organizations today actively in the foreign exchange market. But why do firms engage in foreign exchange? This is addressed below.

 According to Mapletoft (1991), there are three main reasons for dealing in foreign exchange.

To sell receivable or purchase payable, mostly in fulfillment  of business commitments opposite customers or suppliers or financial commitment opposite banks and other institutions e.g interest flows.

To mange currencies as part of a comprehensive ongoing currency management position, where for example maturing forward deals need to be rolled forward to future period.

To take positions where distinct views have been taken within the company on the desire composition of its future flows of currency payable receivable and these views differ from the company natural or unamended position

While the first reason being common to all companies and the second more attributable to the more sophisticated companies, the third reason is the one that most interests the treasure, the bank and the market.

 It is therefore to this third area that most commentators address their attention either to recommend (as bank) or to bear and perceive a means to increasing understanding (as a corporate) or to appraise and evaluate (as an analyst) or simple to comment (as a newspaper). Given the forgoing as reasons to deal in foreign exchange the motivation to act may differ, particularly for the many levels within the corporate organization. The board, the management and the dealer for example may have different views on the corporate decision to act. There are different constraints impacting on the decision making process, these vary between companies with some encouraging disciplined activity inherent in an over risk management strategy.

 The above notwithstanding the rationale is mostly characterized by a range of requirement is involving one or more of the following objective.

To increase certainly: for example, the sale forward of a  debt at least to ensure a given (say dollar or stealing) equivalent value, for costing or return on sales, or to safeguard budget exchange rate for transaction.

To provide an element of smoothing some what more sophisticated and recognizing the volatility of exchange rates, this desires is perhaps not to sell or purchase at necessarily the best rates, but to time the transactions in order to even exchange gains and losses over time and between budget periods.

To improve on market rates: the most difficult task since all market participants would like to achieve this, most difficult task since all market participants would like to achieve this, but nevertheless the final arbiter of the comparative success of the treasury operations.

 

2.4 What makes currencies fluctuate?

 A foreign exchange rate is a price or a numerical expression of value of the currency of one country in terms of that of another country at any given time. Having established the reasons why firms/ banks trade in foreign exchange and the motives for the transaction, it is pertinent to review those factors which make currencies fluctuate.

 Most authorities believes that currencies movement are caused by some or all of the following factors which influence the demand and supply of each currency in the market .

Relative price levels and inflation rate

Relative economic growths

Relative interest rates, especially in the freely traded money market like the Euro currency market.

Relative change in the money supply in the currency areas (countries) concerned

Investment or portfolio preferences of big international investors like the OPEC countries.

. Bandwagon affects (if a currency seems to be on the way up, speculators may exaggerate to trend by buying in the hope of a quick profit)

Intervention by central banks

Interest rate arbitrage.

 

Any of the above factors can independently or in conjunction with other factors affect the value of a particular currency. It is also important to stress the various causes take different time spans to operate.

2.5 Definition and Types of Foreign Exchange Exposure (Risk)

 Exchange rate risk management is an integral part of every firm’s decision about foreign currency exposure (Weston 2001). Currency risk hedging strategy entail eliminating or reducing this risk, and requires understanding of both the ways that the exchange rate could affect the operations of economic agents and techniques to deal with the consequent risk implication (Barton and walker, 2002). Selecting the appropriate hedging strategy is often a daunting task due to the complexities involved in measuring accurately current risk exposure and deciding on the appropriate degree of risk exposure that ought to be covered.

 The issue of currency risk management for banking firms is dependent from there is business and is usually dealt with by their corporate treasuries.

 As mentioned at the beginning of this chapter, when a firm has assets or liabilities denominated in a foreign currency, profitability will be influenced by the changes in the value of that currency.

 Foreign exchange Risk therefore refers to the degree to which a company is affected by exchange rate changes.

Get the complete project »


Instant Share On Social Media:


Can't find what you are looking for?
Call (+234) 07030248044.

OTHER SIMILAR ECONOMICS PROJECTS AND MATERIALS

A COMPREHENSIVE ANALYSIS OF THE EFFECT OF REGULATION AND DEREGULATION OF EXCHANGE RATE ON NIGERIA’S FOREIGN TRADE

 Format: MS WORD ::   Chapters: 1 - 5 ::   Pages: 72 ::   Attributes: Questionnaire, Data Analysis,Abstract

CHAPTER ONE INTRODUCTION Foreign exchange is defined by Samuelson and Mordhaus (1983) “as a currency or other financial institution that allows are country to settle amounts owed to another cou...Continue reading »

A CRITICAL ANALYSIS OF OF THE IMPACT OF POPULATION GROWTH ON THE ECONOMY OF NIGERIA

 Format: MS WORD ::   Chapters: 1-5 ::   Pages: 70 ::   Attributes: Secondary data, Data Analysis, Abstract  ::   5795 engagements

2.1 THEORETICAL LITERATURE The nature of the relationship between population growth and economic growth has so attracted the attention of a large number of the world’s most influential thinkers ...Continue reading »

A CRITICAL ANALYSIS OF THE CONTRIBUTIONS OF COMMERCIAL BANKS TO THE ECONOMIC GROWTH OF NIGERIA

 Format: MS WORD ::   Chapters: 1 - 5  ::   Pages: 75 ::   Attributes: Questionnaire, Data Analysis,Abstract

2.0 THEORITICAL LITERATURE Reforms are predicted upon the need for reorientation and repositioning of an existing status inorder to attain an effective and efficient state. There could be fundamental...Continue reading »

A CRITICAL ANALYSIS OF THE CONTRIBUTIONS OF COMMERCIAL BANKS TO THE ECONOMIC GROWTH OF NIGERIA

 Format: MS WORD ::   Chapters: 1 - 5 ::   Pages: 70 ::   Attributes: Questionnaire, Data Analysis, Abstract

2.0 THEORITICAL LITERATURE Reforms are predicted upon the need for reorientation and repositioning of an existing status inorder to attain an effective and efficient state. There could be fundamental...Continue reading »

A CRITICAL ANALYSIS OF THE CONTRIBUTIONS OF COMMERCIAL BANKS TO THE ECONOMIC GROWTH OF NIGERIA

 Format: MS WORD ::   Chapters: 1-5 ::   Pages: 74 ::   Attributes: Secondary data, Data Analysis,Abstract  ::   5299 engagements

2.0 THEORITICAL LITERATURE Reforms are predicted upon the need for reorientation and repositioning of an existing status inorder to attain an effective and efficient state. There could be fundamental ...Continue reading »

A CRITICAL ANALYSIS OF THE EFFECT OF DOMESTIC DEBT ON THE NIGERIAN ECONOMY

 Format: MS WORD ::   Chapters: 1 - 5 ::   Pages: 57 ::   Attributes: Questionnaire, Data Analysis,Abstract  ::   2158 engagements

1.0 INTRODUCTION 1.1 OVERVIEW OF THE STUDY 1.2 STATEMENT OF PROBLEM The need to finance rising government expenditure has been identified to the rapid increase in the stock of Nigeria’s do...Continue reading »

What are looking for today?

WHAT OUR CUSTOMERS ARE SAYING:
  • 1. Abubakar Sani from Nigerian Investment Promotion Commission said "I had a wonderful experience using ProjectClue, they delivered not only on time, but the content had good quality. I recommend ProjectClue for any project research work.".
    Rating: Excellent
  • 2. Ogunniran Olawale from Ekiti state university said "Projectclue is really safe and reliable Quick access to project works Nice customer service Fast delivery of request Recommend this toy fellow students ".
    Rating: Excellent
  • 3. Fahat Nasir from isa kaita college of education dutsinma said "Fish farming a solution unemployment ".
    Rating: Very Good
  • 4. Ajimbi Oluwarotimi from Theology school osun said "Good ".
    Rating: Very Good
  • 5. Clement Abdullahi Ogiji from National Open University of Nigeria said "I am a living witness and have recommended project clue to a lot of students, so far none have been disappointed, very reliable and, trustworthy and dependable".
    Rating: Excellent
  • 6. Jhuee from Sultan national high school said "Good quality. I recommend project clue for any project research work.".
    Rating: Excellent