The Implication of Foreign Exchange on Profitability of Firms
OBJECTIVE OF THE STUDY
The primary objective of this study is to gain knowledge on the effects of exchange rate and profitability on a firm, using a control variable of interest rate and two key performance variables, return on asset and return on equity of the dependent variable profitability. The specific objectives are as follows:
- To determine the effect of foreign exchange rate on return on asset.
- To determine the effect of foreign exchange rate and interest rate on return on asset.
- To investigate how foreign exchange rate affects return on equity
- To investigate how foreign exchange rate and interest rate affects return on equity.
REVEIEWED OF RELATED LITERATURE
According to Jhingan (2004), the exchange rate between the dollar and the pound refers to the number of dollars required to purchase a pound. The rate is normally determined in the foreign exchange market. Exchange rate is the rate at which a currency is exchanged for another currency. It is referred to as the ratio at which a unit of currency of one country is expressed in terms of another currency. The foreign exchange market is a market where currencies of different countries are bought and sold. It is a market where the values of local and foreign currencies are determined. As noted by Jhingan (2004), the national currencies of all countries are the stock-in-trade of the foreign exchange market, and as such, it is the largest market to be found around the world which functions in every country. Also, Bradley and Moles (2002) defined exchange rate as the price of a unit of foreign currency against domestic currency. Exchange rate is the value of the one unit of foreign currency against local currency and Exchange rate serves as the basic link between the local and the overseas market for various goods, services and financial assets (Reid and Joshua, 2004). Omagwa (2005) posit that exchange rates like any other commodity are explained by the law of demand and supply. Supply of currency is explained by changes in fiscal policies whereas currency demand is influenced by a wide range of factors such as inflation rates and interest rates. Murthy and Sree (2003) argued that exchange rate enables comparison of prices of commodities quoted in diverse currencies. According to Atile and Anan (1984), a stock Exchange is a place where individuals and investors can make or lose money easily. Stock Exchange presents an ideal setting for smart and daring speculator to make a fortune with relatively little effort. Stock exchange is a market place where those who wish to buy or sell shares, stocks, government bonds, debentures and other approved securities can do so though only through members of the stock exchange (Anyanwu, 1993). Thus, it is a market where large and small investors alike buy and sell through stock brokers. In this sense, the stock exchange provides the essential facilities for companies and government to raise money for business expansion and development projects through investors who own shares in companies for ultimate economic benefits of all members of the society. Thomas (2006) found that since the early 1970s, foreign rate exchange system had been a floating one in most countries. The findings were that such nations permitted exchange rates to change in the market place from day to day as per market forces. Before this eventuality central banks of nations intervened in determinations of the exchange rate. This meant that international transactions were never subjected to exchange rate fluctuations risk and as such international transactions were less dynamic. He further stated that since the collapse of this exchange rate system it is markets forces that determine the exchange rate of a nation’s currency. Thus such rates keep on fluctuating as per market forces and therefore exposing international transactions to exchange fluctuation risks. Foreign currency exposures arise whenever a company has an income or expenditure or an asset or liability in a currency other than that of the balance-sheet currency. Indeed exposures can arise even for companies with no income, expenditure, asset or liability in a currency different from the balancesheet currency.
Inflation Rate and financial performance
The central objective of macro-economic policies is to foster economic growth and to keep inflation on a low level. The word inflation rings bell in the market economics of the world. It is a problem that threatens all economics because of its undesirable effects. The problem of inflation surely is not a new phenomenon. It has been major problem of the country over the years. Inflation is a household word in many market oriented economics. Although, several people, producers, consumers, professionals, non-professional, trade unionists, workers and the likes, talk frequently about inflation particularly if the affection has assumed a habitual character yet only selected few mechanisms and consequences of inflation (Omoke, 2010). There is a high level consensus among many economist, central bankers, policy makers and practitioners that one of the fundamental objective of macroeconomic policies in both the developed and developing economics is to sustain high economic growth together with low, one-digit inflation (meaning that inflation is very low) (Chude & Chude, 2015).
In this chapter, we described the research procedure for this study. A research methodology is a research process adopted or employed to systematically and scientifically present the results of a study to the research audience viz. a vis, the study beneficiaries.
Research designs are perceived to be an overall strategy adopted by the researcher whereby different components of the study are integrated in a logical manner to effectively address a research problem. In this study, the researcher employed the survey research design. This is due to the nature of the study whereby the opinion and views of people are sampled. According to Singleton & Straits, (2009), Survey research can use quantitative research strategies (e.g., using questionnaires with numerically rated items), qualitative research strategies (e.g., using open-ended questions), or both strategies (i.e., mixed methods). As it is often used to describe and explore human behaviour, surveys are therefore frequently used in social and psychological research.
POPULATION OF THE STUDY
According to Udoyen (2019), a study population is a group of elements or individuals as the case may be, who share similar characteristics. These similar features can include location, gender, age, sex or specific interest. The emphasis on study population is that it constitutes of individuals or elements that are homogeneous in description.
This study was carried to examine the implication of foreign exchange on profitability of firms. Nestle Nigeria and Switzerland form the population of the study.
DATA PRESENTATION AND ANALYSIS
This chapter presents the analysis of data derived through the questionnaire and key informant interview administered on the respondents in the study area. The analysis and interpretation were derived from the findings of the study. The data analysis depicts the simple frequency and percentage of the respondents as well as interpretation of the information gathered. A total of eighty (80) questionnaires were administered to respondents of which only seventy-seven (77) were returned and validated. This was due to irregular, incomplete and inappropriate responses to some questionnaire. For this study a total of 77 was validated for the analysis.
SUMMARY, CONCLUSION AND RECOMMENDATION
It is important to ascertain that the objective of this study was to ascertain the implication of foreign exchange on profitability of firms. In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing an the implication of foreign exchange on profitability of firms
This study was on the implication of foreign exchange on profitability of firms. Three objectives were raised which included: To determine the effect of foreign exchange rate on return on asset, to determine the effect of foreign exchange rate and interest rate on return on asset, to investigate how foreign exchange rate affects return on equity and to investigate how foreign exchange rate and interest rate affects return on equity. A total of 77 responses were received and validated from the enrolled participants where all respondents were drawn from Nestle Nigeria and Switzerland. Hypothesis was tested using Chi-Square statistical tool (SPSS).
In conclusion, firms operating in the global marketplace must carefully assess and manage foreign exchange implications to maintain profitability and ensure long-term sustainability. Proactive risk management, strategic planning, and a deep understanding of the interconnectedness between currency movements and business operations are vital for navigating the complexities of the foreign exchange market successfully
Based on the implications of foreign exchange on the profitability of firms, several recommendations can be made to help businesses effectively manage their currency risks and capitalize on opportunities:
- Currency Risk Management: Firms should develop robust currency risk management strategies. This involves identifying their exposure to foreign exchange fluctuations and implementing appropriate hedging techniques, such as forward contracts, options, and currency swaps. A comprehensive risk management plan can help protect profits and minimize potential losses due to currency volatility.
- Diversification of Markets and Suppliers: Overreliance on a single market or supplier can expose firms to significant currency risk. Diversifying both customer bases and suppliers across different regions can help mitigate the impact of adverse exchange rate movements on the business.
- Continuous Monitoring and Analysis: Regularly monitoring and analyzing currency trends, economic indicators, and geopolitical developments can provide valuable insights into potential risks and opportunities. Staying informed allows businesses to make informed decisions and adjust their strategies accordingly.
- Flexible Pricing Strategies: Firms should consider adopting flexible pricing strategies that can accommodate changes in exchange rates. Dynamic pricing, which adjusts prices based on currency fluctuations, can help maintain competitiveness in international markets while safeguarding profit margins.
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