Foreign exchange risk management strategies in financial institutions; a case study of Diamond Trust Bank (U) Limited

Abstract

The study examined the foreign exchange risk management strategies used in financial institutions in Uganda; a case study of Diamond Trust Bank Uganda Limited. The research was based on three objectives namely; to identify the existing foreign exchange risk management strategies in financial institutions in Uganda, to examine the lapses in foreign exchange risk management in financial institutions in Uganda and to determine the strategies for improvement of foreign exchange risk management in financial institutions in Uganda. A case study research design was used to conduct the study. The research adopted a quantitative research approach to collect data from the respondents. The study used census sampling in selecting the respondents that participated. From the study, it can be concluded that the financial institutions in Uganda have adopted several strategies to control foreign exchange risks including forward contracts, cross currency swaps, options, leading and lagging, netting, price adjustments and doing nothing. However, the process of foreign exchange risk management is challenged by low transparency, limited access to information, poor regulatory framework, lack of regulators, poor customer’s perception, lack of knowledge in managers and other staff members in management, difficulty in quantifying the exposure and limited access to financial information for decision making. The study recommends that proper training programs should be conducted for financial managers in order to enhance their knowledge about the importance of foreign currency risk and the different techniques used to manage that risk, specialized financial firms that offer a wide range of financial instruments to hedge foreign currency risk can be outsourced. The study recommends that financial institutions should explore avenues to enhance capacities within them for managing foreign exchange risk. The study recommends the use different financial derivatives to eliminate the risk that affect the financial performance of commercial banks. The study recommends that firms should look at instituting a sound risk management system and also needs to formulate their hedging strategy that suits their specific firm characteristics and exposures.