Need for Managing own Exposure to Foreign Exchange Risk: Empirical Evidence from the Nigerian Economy

Abstract

Purpose: The Nigerian national currency (the Naira) has suffered series of exchange rate fluctuation on numerous occasions in the last two years. As a result, the value of the currency has changed significantly and rapidly many times, impacting on both visible and invisible trade. It is common today to hear importers, exporters and even consumers complaining about the adverse consequences of these trends which manifested in form of general rise in prices of goods and services. Studies have shown that many Nigerian foreign traders, particularly those in the small and medium sector, either lack the basic knowledge on how to manage foreign exchange risk or are skeptical about its efficacy. This is surprising considering how costly, in terms of cash flow and profitability, unfavorable changes in the value of the Naira can be. In response to this gap, this paper utilized secondary data on Naira/Dollar exchange rate spanning over 18 months period (January 2015 to June 2016), to provide an empirical understanding of the intricacies of Naira/Dollar exchange rate and how the resultant trends can affect domestic users of foreign exchange in Nigeria and hence the need to privately manage same. The paper thus introduces the subject matter of foreign exchange risk, its determination/calculation using facts and figures and its management to both the public and private business sectors in Nigeria. The empirical results clearly established why it makes sense for stakeholders to reduce exposure to currency risk. The paper also highlighted some of the common techniques and instruments that can be used to mitigate this risk.