Foreign Exchange Rate Exposure Mitigation and Connection to Economic Growth

Abstract

The increasing interest in the subject of management of foreign exchange exposure in Nigeria has been the sequel to the rising transactional, translational and economic risks experienced in the country. Thus, concerns for the incessant devaluation of the naira (increasing foreign exchange rate) continued to mount, explaining the main objective of this study - in attempting to evaluate the most suitable and effective measures and techniques for the management of foreign exchange rate exposures, while attempting to demonstrate the relationship between foreign exchange rate exposures and the economic growth of a developing country like Nigeria. Expo-facto design was deployed for this study. Regression analysis, descriptive statistics, residual statistics, Collinearity Diagnostics and Durbin-Watson were the techniques used to analyze data and examine the relationship between the two major variables of the study. The yearly highest foreign exchange rates (Nigerian Naira to a US dollar) – as at the official market; and the yearly average of the quarterly GDP of Nigeria, constituted the datasets, for the period 2019 – 2023 respectively. The study found that a statistical and significant relationship exists between foreign exchange exposure and economic growth. The study concludes that better exposure mitigation could be achieved with efficient use of hedging measures (currency forwards, currency option currency futures, cross-currency swaps, or even ‘natural’ hedging).