GICHUKI EDWIN MUGO

Phd student Jomo Kenyatta University of Agriculture and Technology

KASIMOLO TIMOTHY NYALI

Mba Student University of Nairobi

Citation: Kasimolo T.M & Mugo G.E. (2015) Corporate Hedging Strategies In The Financial Sector In Kenya.: International journal of Economics & Finance (IJEF), volume 1 (4), 122 -246. ISSN 2105 6008.

Abstract

Corporate hedging is a risk management strategy used in limiting or offsetting probability of loss from fluctuations in the prices of commodities, currencies, or securities. In effect, hedging is a transfer of risk without buying insurance policies. Hedging can reduce underinvestment costs since it reduces the probability of financial distress by shielding future stream of cash flows from the changes in the exchange rates. Variability in cash flows will result in variability in the amount of investment. A decrease in planned investment means that the firm is foregoing positive net present value projects and since it has insufficient internal funds the firm is forced to raise costly external finance. This study established that there is a positive relationship between hedging practices used by companies listed in Nairobi Security Exchange and liquidity ratio, growth option and cash volatility. The study also found that long-term debt negatively influences hedging practices used by companies listed in Nairobi Security Exchange. This study established that most of the companies in Nairobi Security Exchange had experienced liquidity problems in the last 5 years. In addition, the study found that most of the companies in this study had not used hedging practices in the past. This study therefore recommends that companies listed in NSE should make use of hedging practices whenever they are facing liquidity problems

Keywords: Liquidity Ratio, Growth Option, Long-Term debt ratio, Cash flow volatility, Company and Hedging Strategies

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