Management of foreign exchange risks exposure by SMEs in South Africa

Abstract

This research report explores the strategies used by small and medium enterprises (SMEs) in managing the risks associated with foreign-exchange exposure. The research also seeks to discover the reasons why SMEs use these strategies and whether or not they have been effective in managing the risk of foreign exchange exposure. The abandonment of the Bretton Woods system brought a new era of floating foreign exchange rates that led to volatility in the global currency market. Studies have found that SMEs are more vulnerable to fluctuations in the exchange rate than their larger counterparts, which can hedge or absorb the shock. Exploratory research design was used to answer the research questions. A total of ten participants were interviewed for this study and a thematic analysis was carried out on the transcripts. The study found that SMEs use a hybrid method of combining hedging instruments and spot rates to manage the risks associated with foreign exchange. The reason for participants using this strategy is that they have no knowledge of alternatives, as they regard their competitors as in the same situation as they are, and therefore have a reason to investigate alternative strategies.