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Foreign Exchange Rate Risk Management

Foreign Exchange Rate Risk Management

• In one sentence, what is your thesis?

This thesis provides an examination of the effects of stock prices on foreign exchange volatility.

• What have you done that merits a PhD?

I have provided background information regarding the relationship between foreign exchange rates volatility and stock prices. I have also provided current studies that have been done to determine the relationship between foreign exchange volatility and stock prices. I have also conducted an analysis of primary data using GARCH model to come up with correlation between foreign exchange volatility and stock prices.

• Summarise your key findings?

One of the major findings of this study is that there is a relationship between stock prices and foreign exchange volatility. It was also found that volatility is highest in banking institutions followed by insurance companies. This study also shows that sensitivities are evident in the areas of interest rates, market returns and exchange rates in a number of countries in Europe.

• What’s original about your work?

This study is distinctive in that it provides an examination of factors that contribute to volatility of exchange rates apart from stock prices. For instance, the effects of fixed versus floating exchange rates. It also provides effects of fixed exchange rates on the level of risks experienced by countries using these exchange rates. The methodology is original in that it provides a GARCH model that was uses primary data to determine the effects of foreign exchange volatility on stock risk.

• What are the contributions (to knowledge) of your thesis?

This research contributes to knowledge in various areas of study of foreign exchange rates risks and volatility of stock prices in a number of dimensions that cannot be known superficially. For instance, it brings understanding of effects of stock prices on foreign exchange volatility in financial institutions such as banks, insurance companies and Foreign Exchange Companies. It also provides volatilities of various countries with respect to the dollar. This assist in determining volatility of various currencies with respect to the dollar.

• What were some motivating factors behind your research?

The motivating factors behind this research are that the data obtained for this research was obtained from managers of financial institutions such as banks and insurance companies. The responses from these companies are useful in conducting analysis of the correlation between stock prices and FX rates volatility to arrve at the right conclusion regarding the relationship.

• Why is the problem you have tackled worth tackling?

The study of the relationship between foreign exchange volatility and stock prices is significant in addressing understanding of the market conditions that are significant during trade in foreign exchange to avoid burning down of accounts. It is significant in preventing overtrading that result into stirring up of emotions that contribute to wrong decisions.

• What is the relevance of your contributions? • to other researchers? • to industry?

The findings of this study will be useful in making investment decisions by knowing conditions in the market which assist in understanding factors affecting foreign exchange rates. Researchers will be able to use the findings of this study to expand knowledge in understanding of measures that can be used to curb risks that are associated with exchange rates. Industry can also use the findings of this study to put up counteractive measures that prevent a condition where foreign exchange rates are affected.

• How did your research questions emerge?

The research questions were formulated following identification of variables related to foreign exchange rates and stock prices and trying to come up with their contribution towards foreign exchange volatility. The research questions were also based on hypotheses relating performance of stock markets and foreign exchange rates.

Who are your envisioned users?

 BANKING INSTITUTIONS

 It will be useful in knowing the effects of stock prices on foreign exchange volatility. It will be useful in coming up with measures that are useful in controlling negative consequences of stock prices on exchange rates.

 INVESTORS

 It is significant in creation of investment decisions by knowing conditions in the market such as factors affecting currency rates.

ECONOMISTS

This study will be useful in understanding issues that affect performance of stock market. This will be useful in providing the right advice regarding the time for investment in stock market. 

• What are the strongest / weakest parts of your work?

The strongest point of this research is that it results into understanding of measures that can be used to curb factors that cause volatility of foreign exchange rates. It also provides an understanding of the role of type of exchange rates on volatility of stock prices.

• Why have you done it this way? • You need to justify your approach – don’t assume the examiners share your view.

The research has been done using primary methods such as collecting information from managers of financial institutions since they have the experience in consequences of various factors that affect exchange rates. For instance, they have experience   on the effects of stock prices on foreign exchange rates. Thus the responses from them provide an accurate source of data that can be used to analyze the relationship between foreign exchange rates and stock prices.

• Why didn’t you do it the way everyone else does it? This requires having done extensive reading.

This research could not be done by other methods such as current literature concerning the relationship between stock prices and foreign exchange volatility because there is little research that has been done to explain the relationship.

• What are the alternatives to your approach?

The alternative to this research will be a theoretical link between foreign exchange rates and real economy. This will involve a study of effects of exchange rates volatility on foreign exchange with respect to exchange rates in other countries.

• What do you gain by your approach?

The approach used in this study is significant in gaining understating of ways in which foreign exchange rates are affected and their relationship with stock prices.

• What would you gain by approach X?

The alternative approach will be used to determine the relationship between currencies between countries by comparing them with currencies of other countries.

• Looking back, what might you have done differently? This requires a thoughtful answer, whilst defending what you did at the time.

An improvement that would have been done in the study is the effect of foreign exchange rates regime on volatility of foreign exchange rates. This would have been done by comparing the effects of floating and fixed exchange rates on foreign exchange rates volatility.Despite the neglect of this factor, this research provides an understanding of the role of stock prices in affecting foreign exchange rates volatility.

• What do your results mean?

The results of this study show that there is a relationship between foreign exchange rates and stock prices. This relationship is varied based on the type of institution such as banks, insurance companies and FOREX companies.

 
 

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