The Exposure of Albanian Firms to the Exchange Rate Risk and Its Hedging

Abstract

Foreign exchange is among the most important risks facing most economic agents, whether they are corporations, institutional investors, or households. In recent times, the volatility of these rates has increased substantially and, as a result, agents have a greater need to hedge against these risks. In today's business environment, firms find it necessary to hedge the exchange rate risk, which has a big impact in their earnings. This risk affects not only firms engaged in international business but even those operating only in their local markets. Albanian businesses face a high rate of exchange rate risk due to strong business relationships with neighbor countries and broader. Hedging this risk is difficult because in a developing country like Albania, currency derivative market does not exist. The nonfunctioning of Tirana stock exchange, the fact that commercial banks still do not offer forward contract widely, and the lack of financial knowledge among businesses' representatives are among the reasons that makes hedging so difficult in our country.This paper investigates to what extend Albanian businesses face exchange rate risk, and how these businesses hedge it. We have considered a case study from an Albanian firm and found out the ways they protect their earnings from this risk. One concerning finding is that Albanian firms do not hedge financially the exchange rate exposure, even though they have a large degree of exposure. At the end we conclude by developing a framework for currency hedging to be applied from these firms in order to reduce their currency exposure.