Hedging and financial sustainability of commercial banks in kenya

Abstract

Hedging is a precursor for realization of financial sustainability. This is because the nucleus of commercial banks is intertwined with risks that should be off-set. This study sought to determine the effect of hedging on financial sustainability of commercial banks in Kenya.The study adopted a positivism research philosophy and an expost facto research design. Target population was 43 commercial banks. The study adopted panel data and the pooled, fixed effects or random effects models were adopted in the study. The study sought to find-out which model was the most appropriate to explain the effect of hedging on financial sustainability. Findings revealed that the fixed-effect model was the most appropriate model that was adopted to explain the effect of hedging on
financial sustainability. The findings were as follows; options ( β = .0118, p < 0.05), forwards (β = .6116, p < 0.05), swaps (β = .0114, p < 0.05) and futures (β = .5555, p < 0.05). The study concluded that hedging has a significant effect on financial sustainability of commercial banks. Financial derivatives such as options, forwards, swaps and futures helps commercial banks to hedge against risk. Hedging is the most optimal approach for off-setting risk so as to achieve financial sustainability. The fixed-effect model is the most appropriate model to explain the effect of hedging on financial sustainability. The study recommended that all financial institutions should practice hedging so as to off-set risk and be able to realize financial sustainability. Options, forwards, swaps and futures are the financial derivatives that should be adopted by commercial banks to hedge against risk.