Abstract:
1. Introduction
The high volatility of Sri Lankan currency rates exposes firms to escalating
exchange rate risk. A firm with this sort of exposure may employ a variety
of strategies to mitigate the possible risk. Thus, this study aims to identify
the specific methods Sri Lankan-listed non-financial companies use to
mitigate the exchange rate risk.
2. Research Methodology
It employs a qualitative research methodology and focuses on non-financial
companies because they are highly exposed to exchange rate risk due to
frequent Imports and Exports. The sample was selected using the
purposive sampling technique and in-depth interviews were conducted
until it reached a saturation point. The findings are derived from the
thematic analysis approach. Samples were selected based on the firm’s
trading activities with international economies and the amounts of imports
and exports.
3. Findings and Discussion
Findings reveal that companies primarily use natural hedging methods,
such as foreign currency loans, netting, supply chain optimization, Leading
and lagging, and price adjustment. Additionally, companies use forward
contracts as a derivative hedging strategy; however, they are used only
under specific conditions. These Firms rarely use other derivative
instruments such as futures, options, and swaps. This may be mainly due to
the absence of a local stock exchange that provides the opportunity to
invest in those instruments.
4. Conclusion and Implications
This study contributes to the existing knowledge by identifying exchange
rate risk management practices used by Sri Lankan firms. Policymakers
should, therefore, increase the derivative instruments usage, expand the
foreign exchange market, and create a stable economic climate for effective
strategies. Also, it is recommended for company managers improve their
understanding of derivative instruments
