An examination of forex risk hedging practices on profit margins in banking: a case study of Accord Microfinance Bank
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Background of the Study:
Forex risk hedging practices are critical for banks operating in volatile currency markets, as they help mitigate potential losses due to exchange rate fluctuations. Accord Microfinance Bank has implemented a range of hedging strategies—such as forward contracts, options, and swaps—to manage its exposure to forex risk. Between 2023 and 2025, the bank has focused on integrating advanced risk assessment tools and real-time monitoring systems to optimize its hedging practices and protect profit margins (Adeniyi, 2023; Okeke, 2024). These practices allow the bank to stabilize earnings by reducing the impact of adverse currency movements on its international transactions.
Effective forex risk hedging is essential for maintaining profitability, particularly in an environment characterized by rapid economic changes and global market volatility. By employing sophisticated hedging instruments, Accord Microfinance Bank aims to secure its profit margins while continuing to offer competitive rates to its customers. However, the success of these hedging strategies depends on accurate forecasting, timely execution, and continuous monitoring of market conditions. Challenges such as data inaccuracies, delays in hedging execution, and external shocks can compromise the effectiveness of these practices, potentially leading to reduced profit margins (Chinwe, 2023).
This study will examine the impact of forex risk hedging practices on profit margins at Accord Microfinance Bank by analyzing hedging performance data, profit margin fluctuations, and qualitative insights from risk management teams. The objective is to identify areas where hedging strategies can be improved to better safeguard profitability in the face of forex volatility (Ibrahim, 2025).
Statement of the Problem:
Despite the implementation of various forex risk hedging strategies, Accord Microfinance Bank continues to experience profit margin volatility due to currency fluctuations. Inaccuracies in market forecasts and delays in executing hedging instruments have led to instances where the bank’s risk mitigation measures fall short, resulting in significant losses. These issues indicate potential gaps in the bank’s risk assessment and hedging processes, which undermine the overall effectiveness of its forex risk management framework (Okeke, 2024). Additionally, external factors such as geopolitical tensions and unexpected market shocks further complicate hedging efforts, making it challenging to maintain stable profit margins.
The bank’s reliance on hedging instruments, while generally beneficial, may not fully compensate for adverse movements if not continuously refined. Integration challenges between risk management systems and real-time market data can delay the execution of hedging strategies, exposing the bank to heightened risk. Furthermore, inconsistencies in hedging practices across different currency portfolios can lead to uneven protection and affect overall profitability. This study aims to assess the impact of these hedging practices on profit margins, identify critical weaknesses in the current approach, and propose strategies for enhancing the effectiveness of forex risk hedging.
Objectives of the Study:
To evaluate the impact of forex risk hedging practices on profit margins at Accord Microfinance Bank.
To identify challenges in the execution of hedging strategies.
To recommend improvements for optimizing forex risk management.
Research Questions:
How do forex risk hedging practices affect profit margins?
What challenges hinder the effective execution of hedging strategies?
What measures can improve the bank’s forex risk management?
Research Hypotheses:
H1: Effective forex hedging practices significantly stabilize profit margins.
H2: Execution delays negatively impact hedging effectiveness.
H3: Enhanced integration of market data improves risk hedging outcomes.
Scope and Limitations of the Study:
The study focuses on Accord Microfinance Bank’s forex risk hedging practices from 2023 to 2025. Limitations include external geopolitical influences and potential data inaccuracies.
Definitions of Terms:
Forex Risk Hedging: Strategies to mitigate losses from currency fluctuations.
Profit Margins: The difference between revenue and expenses, indicating profitability.
Hedging Instruments: Financial tools such as forwards, options, and swaps used to manage risk.
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