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Foreign exchange risk exposure of listed companies in Ghana

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Purpose ‐ The purpose of this research is to examine the foreign exchange exposure of listed companies on the Ghana Stock Exchange over the period January 1999 to December 2004. The research uses different exchange rate measures namely; the cedi to US dollar, the cedi to UK pound sterling, the cedi to the euro and a trade-weighted exchange rate index to determine the degree of exposure. Design/methodology/approach ‐ The Jorion (1990) two-factor model which regresses the return on a firm against changes in the exchange rate and return on the market is used to estimate the exchange rate exposure for the sample of twenty firms used in this study. Findings ‐ About 55 per cent of firms in the sample have a statistically significant exposure to the US dollar whilst 35 per cent are statistically exposed to the UK pound sterling. Sector specific exposure results show that the manufacturing and retail sectors are significantly exposed to the US dollar exchange rate risk. The financial sector did not show any risk exposure to any of the international currencies. The most dominant source of exchange rate risk exposure is the US dollar. Most firms are also negatively exposed to the cedi to US dollar exchange rate changes, implying that the cedi depreciation vis-à-vis the US dollar adversely affects firm returns. Originality/value ‐ The study reveals the extent of foreign exchange exposure of firms in Ghana and also adds to the limited body of empirical literature on exchange rate exposure of firms in Africa. Results of this study serve as a useful guide to corporate managers and investors on the degree of foreign exchange exposure and the need to effectively manage firm exposure.

Keywords: Exchange rates; Ghana; Stock market; Stock returns

Document Type: Research Article


Publication date: August 21, 2007

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