1.1 Background of the Study
Risk management is a relevant development that arises with deregulation of
Nigerian economy through the introduction of Structural Adjustment Program
(SAP) in 1986. The research was born out of an inquisitive mind and the desire
to gain knowledge about the practice of financial risk management in Nigeria
especially in the area of foreign exchange. It should be recalled that Nigerian
economy moved away from fixed exchange regime in September 1986. The country
returned back to fixed exchange regime in 1994 and guided deregulation in 1995.
(2003) notes that financial risk (which foreign exchange risk is a sub - set)
is the chance or probability that some unfavouable event will occur and which
will adversely affect the financial foreign exchange risk are financial
position or cash flow stream of an organizations other examples of financial
risk apart from foreign exchange risk are ownership, liquidity, credit,
exchange rate, interest rate etc.
topic foreign exchange risk management is relevant because humans are prone to
making mistakes for business concern; all facts of its existence are fraught
with risk exposure. The business environment in which companies operates is
becoming increasingly complex and uncertain due to the globalization of
business and rapid introduction of new technologies.
business decision are taken with complete knowledge about how the future will
evolve with this mind, business managements in twenty first century will
emphasize financial risk management. The successful ones will be assessed on
the basis of its ability and capability to anticipate, plan and controls risks.
subject will continue to be relevant in discourse because terms trading and
investment are modern terms understood by the world.
long as there is flexible and market determined exchange rate, exchange rate
risk will exist and become inevitable.
(1995) stated that foreign exchange risk management is a new phenomenon in the
study of risk exposure. This is because little was known about the subject and
its practice and also foreign exchange management itself has been given little
cognizant in the past and as a result, it was not considered as a possible tool
for long term development in the nations economy.
breakdown in the fixed foreign exchange rate to a market determines exchange
rate was the fundamental factor responsible for the demand for foreign exchange
risk management. Also, development in the fields of communication information
technology, emergence of global investment called derivative securities
(currency futures) options and currency sways) are other factors which
contributed to the emergence of the subject.
business organization are involves in international trade at both export and
import level: demand for exchange of currencies and the presence of exchange
fluctuation is ever present under the arrangement hence exchange risk becomes a
pre - requisities. The major objective of risk management is to maximize
returns and to minimize risk.
is therefore in this light and in an effort to improve the effectiveness of the
foreign exchange risk management in Nigeria that this work was undertaken.
It could therefore be said that the inherent problems as experienced by the
banking industry today can be linked to the partial or total neglect of the
cannons of lending by the officers of the bank, attitude towards risk.
exchange is regarded as a vital instrument in banking industry especially as it
affects the commercial banking system and hence attention should be focused on
this area of endeavor.
Statement of Research Problems
what has been said earlier, business organization and firms operate in an
environment that is characterized by numerous variables.
variables are dynamic in nature. Two calls for corporate planning and
management of foreign exchange risk in an organization in order to cope with
the challenges facing foreign exchange risk management.
is widely acknowledge today that the rate, magnitude and complexity involves in
the management of risk has not been able to achieve their desired goal.
the years, the transaction involving the use of foreign exchange has increase
so also the increase in the risk involve in foreign exchange transaction. The
problem is how to effectively manage these foreign exchange risks.
some of these questions one is tempted to ask include.
What is/are the problems with the management
of foreign exchange risk in the Nigerian economy?
What measures/steps could be taken to
substantially improve foreign exchange risk management in Nigeria?
What is/are the cause (s) of this/these
What role has banks played in improving
foreign exchange risk management
What are the impacts or strategy for
managing foreign exchange risk
Objectives of the Study
study will attempt to ask questions and provide answers to the following.
know if there is any significant relationship between foreign exchange risk and
determine the effectiveness of the techniques and tools being used.
assess the understanding and the depth of knowledge of the practitioners
determine to what extent applicability of the practice of foreign exchange risk management is practiced in the
determine the constraints why the concerned parties are not applying the
possible modern techniques and how they can be employed in Nigerians economy.
Statement of Hypothesis
hypothesis is a testable statement regarding the relationship between two or
more variables that comes from research problems. Aigbokhearvbolo and Ofanson
(2004) in fact, research problems cannot be properly address unless it is
reduced to hypothesis. Hypothesis is a reasonable guess or statement which is
to be tested. (Emele and Emele, 1995).
are stated in Null and alternative form.
null is the hypothesis one need to reject it states that the variables are mot
related. The alternative is the compliments of the null hypothesis, once the
null is rejected with the help of both statistical and quantitative analysis
the alternative will be accepted and vice verse. Using the topic under study
one can now establish the statement of research problem in hypothesis form.
the banks do not bother themselves with foreign exchange risk while transacting
in foreign exchange currencies.
the banks do bother themselves with foreign exchange risk while transacting in
foreign exchange currencies.
2. Ho: Banks
evaluate the risk of foreign exchange exposures using modern techniques before
Hi: Banks do not evaluate the effect of foreign
exchange exposure exposures using modern techniques before transactions.
3. Ho: the banks do not have administrative
policies and control measure to mitigate foreign exchange risk.
Hi: the banks have
administrative policies and control measures in place to reduce foreign
Scope of the Study
research work emphasizes on the practice of foreign exchange risk management in
economy from bankers and its impacts.
it is arranged to find out how losses on fluctuation in exchange rate are
mitigated, controlled, transferred or minimized by the practitioners. Extensive
investigation is conducted on the techniques or tools used and preference (if
any) and why such.
work is restricted to the bank under study. And no attempt was made to compare
findings with what is obtained in other banks within the same sector. Information
was obtained from head office of banks treasury, foreign exchange/
international departments and selected investing company.
Significant of the Study
findings of this study will throw more light on the role of foreign exchange
risk and why it is good for every organization.
recommend more sophisticated method of managing and controlling foreign
exchange risk that would guarantee optimum level of profitability.
will enable the public to know the influence of foreign exchange risk
export the constraints facing foreign exchange risk
work would also serve as a base to subsequent researchers who tend to
understand the same topic or work.
topic will be useful to individuals and banks
Limitation of the Study
previously mentioned earlier foreign exchange risk management practice is not
yet at it’s fullest in Nigeria.
Few works are in existence on the subject in Nigeria seminars papers, work shop
conference proceeding and few text are available.
in the process of gathering the material needed for the project work and data
that are relevant for the project the following constraints were witnessed;
constraints to data availability, time duration posed a limitation, and the
cost to get data and materials was experienced.
Historical Background of United Bank of
the historical emergence from the merger of former Standard Trust Bank and
U.B.A Plc, the U.B.A group was positioned itself to be Nigeria dominant bank
and a leading player in African continent. In 2000, Europe’s frontline finance
and economy magazine, Euro money named UBA The Best Domestic Bank in Nigeria,
in recognition of the banks exponential growth for the past couple of years and
the comparatively higher inflow of investment from global finance player and in
2007 pan African Newsmagazine awarded UBA the Emerging Global Bank which has
most positively influenced the African continent.
has consistently positioned itself as the bank to beat in Nigeria
financially strong banking industry. It has grown total assets by over 345.01
percent in the last five years, up from NGN 198.68 billion ($ 1.656 billion) in
2002 to NGN 884.14 billion central bank of Nigeria, 2007 Bulletin. ( $ 7.368
billion) in 2006 more recently, at the end of 2008 financial year, it recorded
gross earnings of NGN 169.6 billion, profit before tax and exceptional items of
NGN 56.8 billion and total assets of NGN 2.2 billion (central bank of Nigeria
has the largest distribution network in Nigeria with over 6.5 million
customers in personal, commercial and corporate market segments, it has over
14,000 staff globally who are also referred to as a “lions and lioness”
the group has a presence in 18 African countries and in all major financial
centres. The bank currently operate in Nigeria, Ghana, Ivory coast, Cameroon,
Sierra Leone, Liberia, Uganda, Benin, Burkina Faso and, Senegal, and has unfolded
plans to expand its banking operations to 15 additional countries in African.
is the only sub-Saharan Bank with dual presence in the U.S and the UK. It is under
the direction of its G.M.D/C.E.O; Phillip Oduza the management team of the
group is made up of people with skills in various backgrounds as well as depths
Definition of Terms
1. Currency Option:
currency option is an instrument that gives its buyers the right but not the
obligation to buy (all options) or sell (put options) a certain quantity of a
specified foreign exchange at a specified rate of exchange (the exercise price)
within a certain limited time or at the end of that time (C.R.A Olowe 1997)
2. Currency Future:
these are form of forward contracts, which gives a fixed rate for security
price or interest rate or exchange rate at future date.
hedging occurs when an enterprise deliberately invest in an asset or grant loan
to depreciate the rate of exchange. Hedging attempts to immunize an investment
from currency movements up and down.
4. Currency Swap:
a swap is an instrument that combines a spot purchase (or sale) of foreign
currency against a future sale (or purchase) of the same currency in effect, a
soap facilitates a temporary exchange currencies.
this is a process of buying the money of one country in the foreign exchange
market and selling it in another at a higher price
6. Spot Transaction:
this is an agreement to deliver some amount of one currency in two business
7. Pegged Exchanged Rate:
the official determined exchanged rate under fixed exchange rate
8. Rate of Exchange: the
basis upon which money of one country will be exchange for that of another.
9. Currency Conversion:
it is the process of expressing or stating transaction or operation in foreign
currency of one country to that of another using the rate ruling on the
transaction date or an agree rate.
Translation: it is the process of restating
accounting balance of foreign currencies of one country using appropriate rate
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(2008) Research Methodology. Ejodamen Publishers, Benin City.
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Volume 18 December 2007.
Central Bank of Nigeria (2008) Statistical Bulletin:
Volume 18, December 2008.
Cliff C.N. (2003) Elements of Banking in
for Tertiary Institutions. 2nd Edition: Adson Publishers, New York.
Egnuonwu, R (1995) Corporate Financial
Risk Exposure Management: Stride Associate Ltd, 1995