MASTER THESIS IN FINANACE AND ACCOUNTING Managing Foreign Exchange Exposure A case study on Lanka Ice September 2012/2013 Chileshe Stephen Nkhata Supervisor: Rolf J. Ornée, MBA, PhD (cand.) MFA (0859294)
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C.S. NKHATA MFA (0859294) 2 | P a g eEXECUTIVE SUMMARY The purpose of this thesis is to examine current practices at Lanka Ice Group of companies’ risk management activities, identifying strengths and weaknesses, and make recommendations. To carry out the objectives a single case study was selected and conducted using qualitative methods, with primary data sourced from company data and interviews Currency volatility has increased and firms face uncertainty with regards to prices of various goods and services. Large or small, trading or non trading, firms are exposed to economic, transaction, and translation risks, respectively. Risk management activities are aimed at minimizing expected earnings variability. Risk management offers an avenue for firms to shift risk they cannot bear to those better equipped to do so Arguments for and against have been put forward for the use of financial risk management products. Those arguing against suggest that markets are efficient and that investors are diversified and therefore managing risk by corporate mangers is not a value adding activity. It is cited that managers destroy shareholder value in favour of their own empire building. Revelations on financial engineered products and some of their disastrous consequences have reignited arguments on risk management and the costs involved. Firms face the choice between internal and external ways of managing currency exposures