A SURVEY OF EXCHANGE RATE FLUCTUATION ON TEA EXPORT EARNINGS AMONG SMALLHOLDER TEA FACTORIES IN KENYA By COSMAS KIPLAGAT CHEROP D61/P/8025/04 A MANAGEMENT RESEARCH PROJECT REPORT SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD OF DEGREE OF MASTER OF BUSINESS

This study sets out on a survey to establish how earnings among smallholder tea factories are affected by this arrangement. The smallholder tea factories are managed by KTDA Ltd on behalf of smallholder tea growers. The research design used in this study is survey design. This involved collection o f data from members o f the population in order to determine the current status of that population with respect to various variables. It entailed asking respondents questions by administering a questionnaire and by interviewing them. The target population in the study is 59 smallholder tea factories exporting their tea produce through Mombasa Tea Auction. These factories are situated on the highlands. They are spread some to the East and some to the West of the Great Rift Valley. The factories are managed by KTDA Ltd and the sample and sampling techniques is census. This study utilized a questionnaire in conjunction with interviews and content analysis. The study has also employed correlation analysis technique. The analysis shows that there is a positive relationship between percentage changes in exchange rate and percentage change in net pay per kilogram o f green leaf paid. This research concludes that exchange rate fluctuation has some effects on the earnings of smallholder tea factories. There is positive correlation between appreciation of Kenya shilling and increase in earnings. The appreciation of Kenya shilling relates positively to increase in value of sales in Kenya shilling but inversely related to the quantities o f teas exported.


ABSTRACT
This study sets out on a survey to establish how earnings among smallholder tea factories are affected by this arrangement. The smallholder tea factories are managed by KTDA Ltd on behalf of smallholder tea growers. The research design used in this study is survey design.
This involved collection o f data from members o f the population in order to determine the current status o f that population with respect to various variables. It entailed asking respondents questions by administering a questionnaire and by interviewing them. The target population in the study is 59 smallholder tea factories exporting their tea produce through   The proceeds from international trade are basically paid in any o f the hard currencies and they are usually exchanged to the local currency in order to facilitate and meet local obligations.
The hard currencies can either be sold to a banker or foreign exchange dealer (Matsuyama et al., 1993).
Exchange from a hard currency to a local currency can lead either to foreign exchange loss or Woods consisted o f the World Bank and the International Monetary Fund (Masson et al., 1996).
The Foreign Exchange Market is, by most accounts, the oldest, and most extensive financial market in the world (Feder, 2009). The market in Kenya as in any developing economy is unified onshore spot market mainly for US dollars and transactions are concentrated at the bank-customer level. Over a long period o f time, international trade has been regarded as major path in achieving economic development (Bordo and Harold, 2006). Ezeala-Harrison (1999) stated that international trade is an important "engine" that drives economic growth o f nations and international competitiveness is the "fuel" that empowers that engine and hence improves the economic performance o f a country. Exchange rates are affected by various factors which either is economic, political, social, and environmental or a combination o f any 1 of them. Exchange rates react quickly to news about current and potential monetary and fiscal policies (Ezeala-Harrison, 1999

Exchange Rate Fluctuation
Currency appreciation occurs when there is an increase in value o f one currency with respect to another currency (Papell, 1998 (Papell, 1998

Tea Export Performance
Tea export is categorized under traditional agricultural export in Kenya. Tea export earnings are among the top three foreign exchange earners in Kenya. There was a sharp increase in prices of tea in the 1970s. Kenya's export structure is predominantly composed o f primary commodities -mainly tea, coffee and horticulture -besides tourism. Tea exports took the lead in the 1990s. The tea industry has remained stable, with increases in production levels and therefore earnings from exports. However, the industry has also been faced with problems of overproduction, declining prices in the world markets and poor institutional management (Were et al., 2002).
Tea production is labour intensive and therefore millions o f rural populations depend on the industry for their livelihoods. Kenya and Sri Lanka control 40 percent o f the world exports and have large smallholder subsector (World Bank, 2008). Tea is therefore important within the economy and is critical form o f export income. Until recently the price trend for tea has been downward. According to Food and Agriculture Organization (FAO) composite index, the price of tea has been gradually increasing. However, long term analysis taking inflation into account indicates that the real tea price dropped substantially as producers now receive less than half of what they did 3 decades ago (Gesimba, 2005). Tea is the leading agriculture export in Kenya. On average, it contributes 28% o f the value o f total agricultural exports, followed by horticulture 20%, fish 9% and coffee 4.2%, and others 38.8% (Gesimba, 2005 1964-1973, 33.2% in 1974-79, 29.8% in 1980-89, 26.2% in 1990-95, and 24.5% in 1996-2000

Statement of the Problem
Exporters of all commodities expect to make a profit from their export trade. This is only possible where foreign exchange rates are stable. Exporters are negatively exposed to foreign exchange rate fluctuations because the extent o f depreciation is higher than that of appreciation which was 18.0% and 5.6% for (GoK Economic Survey, 2009. Kimani (2007) tested the efficiency o f foreign exchange market in Kenya and found out that forward exchange rates are biased predictors o f future spot rates. Ndunda (2002) and Kurgat (1998) carried out studies on efficiency o f foreign exchange markets in Kenya from the basis of simple trading rules and found out that there was presence o f unexploited profit opportunities for those who participate in exchange rate transactions in the Kenyan foreign exchange market and therefore concluded the rational expectation approach is inefficient in foreign exchange market in Kenya. Kiptui (2007) in his presentation paper notes that real exchange rate has positive effects in the short-run but that these effects were found to be statistically insignificant. Kimani (2007) notes that there is presence o f a risk premium and therefore participants in the FOREX market in Kenya conduct their transactions on the basis of speculation rather than on prediction o f future market behavior based on the past or current performance o f respective currency.
It is apparent from foregoing empirical review that there has been no research to study the effect of exchange rate fluctuation on tea export earnings among smallholder tea factories in Kenya. There is also inflexibility o f substituting the US dollar for any other currency at Mombasa tea export market. It is apparent from studies done by Ndunda (2002), Kurgat (1998), andKimani (2007) that there are arbitrage opportunities and market inefficiency in Kenya. There was therefore a need to conduct a research so as to find out how smallholder tea factories in Kenya are affected by exchange rate fluctuation and find out how they can manage the fluctuation exposures.

Research Questions
This research attempted to answer the following questions: 1. How has exchange rate fluctuation affected the earnings among smallholder tea factories in Kenya?
2. How has KTDA managed exchange rate exposure among smallholder tea factories in Kenya? f

Objectives of the Study
The specific objectives were: 1. To determine how exchange rate fluctuation has affected the earnings among smallholder tea factories in Kenya.

2.
To determine how KTDA has managed exchange rate fluctuation exposure among smallholder tea factories in Kenya.

Significance of the Study
The outcome of this study will benefit the Government o f Kenya in managing exposure to foreign exchange rate fluctuations. It will enable the government to plan with a view to cushioning its exporters and importers from foreign exchange rate fluctuation risks. It will also enable the government to improve its foreign exchange reserves management strategy. 5 The government will be able to plan and allocate adequate resources to the export sector and enhance the capacity o f smallholder tea factories and all stakeholders in the export sector. This can be done by enhancing export earnings which is an essential function o f the foreign currency fluctuations. It will also benefit academicians who are interested in the study o f local currency fluctuation against hard currencies. The findings from this study will also open new areas of interest in the academic world as researchers will take interest in the research findings.
This study will benefit smallholder tea factories whose major market is the export market. The study will therefore provide the information about the earnings o f smallholder tea factories as such information is vital for enhancing the capacity o f smallholder tea factories to realize profits by understanding the currency regulatory framework that would help them to know to manage exchange rate fluctuation exposure.
The findings will also benefit investors in managing their foreign exchange earnings. The results o f this study will assist all the stakeholders in the export sector in making crucial decisions towards management o f fluctuating exchange rates exposures. It will enable exporters to plan with some degree o f certainty in circumstances where foreign exchange exposure can be managed. 6 CHAPTER TWO: LITERATURE REVIEW

Introduction
This chapter reviews relevant literature on foreign exchange rate fluctuation. It cites review material relating to foreign exchange rate fluctuation and how it affects world trade both in international and in the local context. The purpose o f this literature review is to try and establish the extent to which researchers have studied foreign exchange fluctuation. This will enable this study to review and use some useful information arising from their research findings. It will also enable this study to improve on some aspects o f their research findings and also concentrate this study on areas which hitherto has not been researched on. The reviewed source materials will include books, journals, periodicals, magazines and the internet (Brodkin, 2007). The theoretical framework o f this study has its basis on currency theory, interest rate parity theory, purchasing power parity theory and arbitrage theory.

Concept of Currency and Currency Market
Currency is the acceptable means o f purchasing through trade. It comprises money supply o f a given nation, that is, coins and notes. It is variably referred to as legal tender. Many countries in the world have their own currencies. Ezeala-Harrison (2009) defines hard currency as currency in which investors have confidence. Today, currency generally refers to printed or minted money. In order for any currency to be considered hard, the country needs to have a stable government, sound fiscal and monetary policies, and low inflation (Ezeala-Harrison 2009). Currency involves the exchange of goods and services for cash. The hard currencies are international currencies in the sense that they are acceptable internationally. They are used for transactions in many foreign countries, including transactions between locals.
The currency market is the foreign currency market. This is where trading in currencies take place. Trading on the Foreign Exchange Market establishes rates o f exchange for currency.
Exchange rates are constantly fluctuating on the foreign exchange market. As demand rises or falls for particular currencies, their exchange rates adjust accordingly. Instantaneous rate quotes are available from a service provided by Reuters. A rate o f exchange for currencies is the ratio at which one currency is exchanged for another (Cross, 1998).

Exchange Rate Regimes for Major Currencies
A country which produces hard currency has many advantages over those countries that do not. Possessing hard currency makes it much easier to do business worldwide. It can be equated to having a good credit score and shopping for a car. One will be much more likely to not just to get the car, but get it cheaper with a good credit score. Countries like Japan, Britain and United States o f America have taken full advantage o f printing hard currency (Duarte and Obstfeld, 2005). Over the history o f currency, countries' currencies have fluctuated between hard and soft. The challenges o f the world's currency super powers are to maintain their economic hold and maintain their hard currency reputation (Duarte and Obstfeld, 2005).
Exchange rate regime has undergone substantial changes. The Euro became the currency for the Euro as an emerging international currency (Robert, 2009). The greatest concern in behavior of major currency exchange rates has focused on their large medium-term movements. Wide swings are identified with "misalignments". These require to be avoided or at least their effects need to be moderated (Dufrenot, 2007).

Industrial Countries
Exchange rate movements can be explained by the efficient or rational adjustment o f foreign exchange markets to economic fundamentals. In the long run, the exchange rate is determined consistent with a monetary approach to exchange rates, while cyclical factors have an impact on short-run exchange rate dynamics (Johnston and Sun, 1997).  (Quirk, 1987).
The birth of the euro at the beginning o f 1999 marks the fourth phase in the evolution o f the postwar exchange rate system, a phase that will likely see an increase in bi-or tri-polar system characterized by a high degree o f capital mobility and variety o f exchange rate practices across countries (Prati et al., 2010).

Risk Management
Foreign exchange trading involves such large cross-border settlements that a failure by one party to deliver the currency needed for a single settlement could disrupt the global financial system. The foreign exchange market is by most account, the oldest, largest and most extensive financial market in the world. The Bank for International Settlement (BIS) estimated that daily average turnover in the global foreign exchange market was $1,190 billion in April 1995. In comparison, average daily turnover during the same period in the next largest financial market -US government securities -was $175 billion (excluding repurchase and reverse repurchase agreements); in the world's ten largest stock markets together, it was a mere $42 billion (Laura, 1996).
The foreign exchange market is highly liquid. Transactions tend to be large and are executed frequently (Laura, 1996). Exchange rate is defined as the rate at which one currency can be converted, or 'exchanged', into another currency. There are four types o f currencies that can be operated, which is a floating, semi-floating, managed and fixed exchange rate (Laura, 1996).
There are different strategies for managing a portfolio's foreign currency exposure, which fall into three broad categories o f using hedging tools to protect against currency losses. The simplest approach adopted by international portfolio managers and investors is not to hedge the currency risks at all (Abrams, 1998). Some argue that there is a correlation between the performance of a foreign equity market and strength o f the foreign currency. Others believe that currency fluctuations tend to wash out over an extended period o f time. Neither o f these arguments, however, can be proven conclusively, although there is practical evidence to support each of them. Another argument supporting the non-hedging approach is that foreign currency exposure helps diversify a portfolio (Levy-Yeyati, 2004). 9 In contrast to the non-hedging approach, some international investment managers go to the other extreme and hedge 100% o f their currency exposures. This group believes that foreign exchange rates are highly unpredictable and that currency risks in non-dollar securities should always be fully hedged. In theory, an international investment portfolio would become a pure equity or fixed-income play, free o f currency risk, if the foreign currency exposures o f the portfolio were fully hedged. The key argument for hedging is that it reduces a portfolio's volatility resulting from currency fluctuation. But hedging costs tend to reduce overall returns over time, compared with an un-hedged portfolio (Karmin, 2007).
Balancing the pros and cons o f hedging, the third strategy falls somewhere between the two extremes. Fund managers who use an actively managed hedging approach hedge selectively: sometimes no hedge, sometimes a partial hedge, and sometimes a full hedge. The selective approach is gaining in popularity. Most investment firms now offer some kind o f currency service, and some firms with substantial international investments even appoint a separate manager to handle currency as a distinct asset class (Karmin, 2007). performance in a significant manner (Clark, 1997).

Arbitrage Theory
Arbitrage pricing theory (APT), in finance is a general theory o f asset pricing that has become influential in the pricing o f stocks. It is the process o f earning riskless profits by taking advantage of differential pricing for the same physical asset or security (Sharpe 2004). It entails the sale o f a security at a relatively high price and simultaneous purchase o f the same security (or its functional equivalent) at a relatively low price (Taylor, 1989). In the APT 10 context, arbitrage consists o f trading in two assets with at least one being mispriced. The arbitrageur sells the asset which is relatively too expensive and uses the proceeds to buy one which is relatively too cheap (Frenkel, 1975).

Purchasing Power Parity
Purchasing power parity (PPP) is a theory o f long term equilibrium exchange rates based on relative price levels o f two countries. The PPP exchange-rate calculation is controversial because of the difficulties o f finding comparable baskets o f goods to compare purchasing power across countries. We apply PPP theory to the analysis o f long-run equilibrium in the foreign exchange market. The concept is founded on the law o f one price which states that in the absence of transaction costs, identical goods will have the same price in different markets.
People in different countries typically consume different baskets o f goods (Wei, 1995). In its "absolute" version, the purchasing power o f different currencies is equalized for a given basket of goods. In the "relative" version, the difference in the rate o f change in prices at home and abroad (the difference in the inflation rates) is equal to the percentage depreciation or appreciation of the exchange rate. PPP exchange rate (the "real exchange rate") fluctuations are mostly due to different rates o f inflation between the two economies (Rogoff, 1996). Engel (1996) in his analysis o f the behavior o f the exchange rate in three EMU countries in the period 1960-1999 found out that there was non-stationarity o f the real exchange rate, which is a symptom o f the long-run persistence o f disequilibria in the foreign exchange market. He also found out that some real exchange rate series were trend stationary and this lead him to believe that there is a mean reversion phenomenon around a trend. In a situation in which PPP does not hold, agents believe, on account o f some "natural reason", that as time goes by, the dominant currency in the EMS (the German Mark) will appreciate. However, he concluded to the contrary that the weaker currencies -especially the Portuguese Escudowere the ones that with passing o f time appreciated in real terms (Engel, 1996).
It is necessary to compare the cost o f baskets o f goods and services using a price index. This is a difficult task because purchasing patterns and even the goods available to purchase differ across countries. Thus, it is necessary to make adjustments for differences in the quality o f goods and services (Kim, 1990). Additional statistical difficulties arise with multilateral comparisons when (as is usually the case) more than two countries are to be compared. When UNIVERSITY oc-11 PPP comparisons are to be made over some interval o f time, proper account needs to be made of inflationary effects (Engel, 1996).

Interest Rate Parity
Interest Rate Parity is an economic theory based on interest rates and exchange rates, stating that the difference between interest rates in two countries is the difference between the forward (future) rate and the spot (current) rate o f their two currencies (Adrangi et al., 2007).
If this parity or equilibrium is broken, then arbitrage exists resulting in a risk-free return (Edison, 1987). According to this theory, an investor who uses two different investment styles should achieve equal amount of returns from the two styles (Edison, 1987).
There are two types of interest rate parities -covered and uncovered. Covered interest rate parity is where the investor "covers" him self through a forward contract against the currency changes. Uncovered interest rate parity assumes that the difference between the interest rates of two currencies will equal the predicted depreciation o f a currency (Clinton, 1988). Adrangi et al. (2007) found out that uncovered IRP does not exist in any o f the three Asian emerging markets-Korea, Philippines and Thailand -tested for the post-1990 periods. They also found evidence that the currencies o f higher interest rate among emerging economies tend to depreciate in the forward market. However, their test results indicated that this relationship does not support the uncovered interest parity strictly and the currency markets in these nations are not fully efficient. Arbitrage opportunities remain for a longer periods than predicted by the uncovered interest parity (Adrangi et al, 2007).
Summaries of empirical evidence (Van Home, 1998) shows support for covered IRP among the United States, Japan, and most European countries in that there is generally an offsetting relationship between interest rates and the forward exchange rate relative to the spot rate, and that the cost o f hedging offsets any yield advantage. Specifically, studies such as those done by Rhee and Chang (1992), and Abeysekera and Turtle (1995), found out that major global markets are efficient in the sense that profit opportunities from traditional covered interest arbitrage were rarely available in the 1980s and early 1990s. This is due to an (almost) absence of imperfections among these major economies. Most studies also show that IRP is stronger for short-term rates and weakens with longer maturities (Abeysekera, 1995).

2.2
Empirical Review

Exchange Rate Fluctuations
There has been an ongoing debate on the appropriate exchange rate policy in developing countries. It focuses on the degree o f fluctuations in the exchange rate in the face o f internal and external shocks. Exchange rate in turn is likely to determine economic performance (Devarajan et al., 1993). A depreciation (or devaluation) o f the domestic currency may stimulate economic activity through the initial increase in the price o f foreign goods relative to home goods. By increasing the international competitiveness o f domestic industries, exchange rate depreciation diverts spending from foreign goods to domestic goods. As illustrated in Guitian (1976) and Dombusch (1988) the success o f currency depreciation in promoting trade balance largely depends on switching demand in proper direction and amount, as well as on the capacity of the home economy to meet the additional demand by supplying more goods (Frankel, 1998).
Fluctuations are realized around a steady-state trend that is consistent with variation in macroeconomic fundamentals over time. Uncertainty enters the model in the form o f disturbances to both aggregate demand and aggregate supply. Within this framework, aggregate demand is affected by currency depreciation through exports, imports and the demand for domestic currency. Aggregate supply is affected through the cost o f imported intermediate goods (Kandil, 2000).

Hard Currencies
Although participants in the foreign exchange market are increasingly scattered around the globe, most transactions still take place in London, New York, and Tokyo. London dominates the foreign exchange markets, with 30 per cent o f all transactions; New York's share is 16 percent. Tokyo's share, now 10 percent, has been whittled away by the markets o f Singapore and Flong Kong, which are fast gaining prominence (Laura, 1996). sluggishness was an important factor that had been neglected by previous studies, and they offered an alternative model with price inertia and variable international competitiveness (Krugman, 2000).  (Krugman, 2000). Smith (1994) one o f those whose results were challenged in the paper, reported the results o f some tests he had carried out using the monetary model. These confirmed the authors' conclusions that a mixture o f time-dependent and state-contingent factors were operating on the exchange rate, but they also provided weak evidence that the state-contingent element was the more important. While he acknowledged that the model with price inertia had a number of interesting features, he questioned whether price stickiness had been an important factor historically.
In the lively discussion that followed Obstfeld (Harvard University, NBER and CEPR) and Paul Krugman both argued against the need to introduce a new class o f agents, and Krugman questioned the "pure strategy solution" proposed, since by holding the currency the arbitrageurs would prevent the appreciation from which they hoped to benefit. He suggested that a 'mixed strategy solution', in which the willingness o f arbitrageurs to hold the currency is uncertain, would be logically satisfactory, although it would not provide a realistic description of economic behavior (Krugman, 2000).
Central Exchange rates of the major currencies; the U.S. dollar, the deutsche mark, and the Japanese yen and those o f other important industrial countries have exhibited substantial short-run volatility, large medium-term swings and long-term trends in exchange rates in nominal as well as real terms (Laura, 1996).

Foreign Exchange Market in Kenya
Kimani (2007) tested efficiency o f foreign exchange market in Kenya and found out that forward exchange rates are biased predictors o f the future spot rates. Local studies carried out on efficiency of foreign exchange markets in Kenya by Ndunda (2002) and Kurgat (1998) looked at efficiency from the basis o f simple trading rules. Kiptui (2007) in his presentation paper notes that real exchange rate has positive effects in the short-run but that these effects were found to be statistically insignificant. Kimani (2007)

Effects of Liberalization on Tea Industry in Kenya
Studies have been conducted on the effects o f liberalization on income o f smallholder tea producers in Central Kenya and it was found out that smallholder tea producers sell their green tea to KTDA managed factories since there is no other competitor and that the growers relied on KTDA for their farm inputs (Karugo, 2003). Karugo (2003) found out in his studies that tea output would continue to rise regardless of the trend o f prices o f green leave delivered to factories for processing. Smallholder tea growers stand to benefit through bonus payment if 16 they agree to be paid lower rate as initial payment for green leave delivered.

Effects of Exchange Rate on Tea Pricing
Some studies have been done to establish factors affecting tea pricing at the Mombasa Auction. Mukhweso (2003) noted that tea pricing did not obey the market forces o f demand and supply. Tea pricing is dependent on quality, internal and external environment o f the market. Tea Auction market is not efficient as entry by newcomers is restrictive both for buyers and brokers. Tea buyers do it on behalf o f wholesalers who are resident abroad but only sent bids once they are advised on the garden prices as contained in the price catalogue (EATTA, 2007).

Exchange Rate Fluctuation and Arbitrage
Achieng'-Tocho (2007) (Wekesa, 2006). Traditionally, interest rates on price differential have been thought to be among the key determinants o f changes in the exchange rate. However, the role of current account balance has become increasingly recognized. Key events and expectations associated with key announcements particularly donor funding, also influence exchange rate movements. One o f the important sources of foreign exchange is tourism. By putting in place the right policies for the promotion o f tourism, the country will be improving currency availability in the market at the same time (Wekesa, 2006).

Conclusion from Literature Review
It is apparent from literature review that most scholars have been concentrating on currency fluctuation in general terms and on the assumption that there is a standard international currency. This has tended to force scholars to concentrate their studies alongside existing theories such as Fisher effect, Interest Rate Parity, Purchasing Power Parity which state that mechanisms exist to automatically correct differentials in exchange rates over time. It assumes further that there is a common denominator (basket o f goods) which can be used to determine the actual exchange rates between two currencies. It is also apparent from the literature review that that exchange rates are constantly fluctuating at foreign exchange markets not solely because of market forces o f demand and supply. The preposition presupposes that all players are knowledgeable o f currency movement in the market. This is not true as foreign exchange trading involves large cross-border settlements involving huge turnover (Laura, 1996).
There is a need to relook at previous studies with a hyperinflation needs to be under studied so as to find a solution otherwise some currencies will convert to soft currencies. The need for an international currency may need to be approached from regional trading blocs. Regional currencies may ultimately convert to international currency. Studies needs to be conducted and their findings may be used to encourage countries to accept regional currencies within trading blocs. As pointed out by Kimani (2007) in her study, it is apparent that Kenyan exporter can exploit arbitrage opportunities created by inefficiency in foreign exchange market in Kenya. The above conclusion was confirmed by a study conducted by Wekesa (2006).

Introduction
This chapter details the type o f research that was conducted, the target population, the sample size, how the researcher gathered the necessary data, how the collected data was arranged and analyzed. It also details the type o f software package which was used in data analysis.

Research Design
Survey design was used in this study. This involved collecting data from members o f the population in order to determine the current status the population with respect to various variables. It entailed administering a questionnaire and interviewing respondents. This design was suitable for this study as it obtained information that described existing phenomenon through asking individuals about their perceptions, attitudes and behaviours. It was also suitable for this study as it entailed retrieval o f actual data and by asking management about their perception and how they have been managing exchange rate fluctuation exposure in the past.

Target Population
This study considered export earnings from all factories owned by smallholder tea growers.
There are 59 smallholder tea factories exporting their tea produce through Mombasa Tea Auction. These factories are situated on the highlands. They are spread some to the East and some to the West o f the Great Rift Valley. The factories are managed by KTDA Ltd.

Sample and Sampling Techniques
This study has reviewed data from all the 59 smallholder tea factories. It was a census.

Data Collection Tools and Techniques
This study utilized a questionnaire in conjunction with interviews and content analysis.
Questionnaire and content analysis was used in this study. Kothari (2005) notes that questionnaires are simple to administer and they are relatively cheap to analyze. Unlike interviews, questionnaires pose same structured and standardized questions, and the reply is in the words of the respondent and thus it is free from interviewer's bias. It gives the respondent adequate time to give thoughtful answers and it can cover extensive content within a short time and at reasonable cost. 20 The study relied on a questionnaire and secondary data. It considered tea export sales data reports for period 2000 to 2009. The 10 year period has been chosen as this is a period long enough for a trend to be established. The study retrieved annual export sales data which had already been translated to Kenya shillings from US dollars. This data was sourced from reports maintained by Sales and Marketing Department, and Accounts Department o f KTDA Ltd. The source of data on foreign exchange fluctuations was Central Bank o f Kenya.

Data Analysis Techniques
This study employed correlation analysis technique. This is a statistical technique for

Introduction
Data has been collected from KTDA Ltd. The data used include annual average exchange rate, average selling price, total annual sales in kilograms, total annual earnings in Kenya shillings, and amounts paid out per kilogram o f green leaf to tea grower. The data was analysed using Spearman Correlation Analysis
£ d 2 = 1 + 1 + 1 + 25 + 1 + 1+49 + 1 = 80 Step 2: 6 E rf2 n ( n 2 -1) 22 Step 3: The sum o f dj information from Step 2 above and the number o f scores in each variable (n) is substituted into the formula:  The exchange rates as depicted in figure 1 above shows that the rates had higher swings within the year and this is explained by higher average rates in 2002, 2004, and 2009. Step 1: Summation o f the differences in ranks squared (dj2).
£ ci,2 = l + 4 + l + l + 9 + 4 + l + l = 22 Step 2: 6 Z d f n ( n 2 -1) Step 3: The sum o f dj2 information from Step 2 above and the number o f scores in each variable (n) is substituted into the formula:  Step 1: Summation o f the differences in ranks squared (dj ).

Factories in Kenya
The analysis shows that there is a positive relationship between percentage change in exchange rate and percentage change in net pay per kilogram o f green leaf paid. Table 3 shows that as Kenya shilling appreciates payment for each kilo o f green leaf increases which is peculiar given that exports earnings is expected to go down as the shilling appreciates.
Further analysis shows that the foregoing scenario was reversed by a marked increase in quantities exported. It is important that exporters are sensitized on the need to keep proper records on export earnings. This will be o f use during researches in export sector o f the economy. It is beneficial as well for exporters to distinguish sources o f income which forms the integral part o f their performance as this will ensure that correct interventions are applied to deal with respective problems.

Qualification and Limitation of the Study
It is worth noting at this stage that KTDA Ltd does not compute exchange gains or losses arising from translation o f dollars from tea exports. The amount held in foreign denominated accounts is translated at the ruling exchange rate on the last day o f the period. This is for purposes of establishing the amount o f cash in Kenya shilling equivalent which will be used 35 in preparing financial statements. The study intended to compare exchange gains and losses with exchange rate fluctuations. This denied this study the opportunity to conclusively indicate whether or not exchange rate fluctuation exposure affected the earnings o f smallholder tea factories either positively or negatively. However, this research used selling price, gross earnings and quantities sold to gauge how earnings among smallholder tea factories were affected by exchange rate fluctuation exposure.

Areas Recommended for Further Study
There is need for further research into how firms manage exchange rate fluctuations. This will lead to better ways o f dealing with adverse effects and how to enhance favorable effects.
There is also need for a study to establish how the importers are affected by exchange rate fluctuations. This will enable the economy to handle exchange rate fluctuations fairly without hurting one side o f international trade and the economy.
There is also need to study sensitivity o f exchange rate as to export earning and import costs.
Some areas of the economy do not respond equally, effectively and efficiently to exchange rate fluctuations. When the economy establishes sensitivities then efforts will be direct towards addressing the imbalances or towards mitigating the impact.

LETTER OF INTRODUCTION
Dear Sir/Madam,

RE: RESEARCH INFORMATION
I am a postgraduate student in the School of Business, University of Nairobi. As part of my MBA (Finance) course requirements, I am undertaking a research project that seeks to establish "exchange rate fluctuation exposure among smallholder tea factories in Kenya".
To fulfill information requirements for my study, I intend to collect secondary data from your esteemed institution. The information requested is needed purely for academic purposes and will be treated in strict confidence and will not be used for any other purpose other than for my research. # I would be most grateful if you can allow me access to all the relevant information pertinent for this research. Any additional information you might consider necessary for this study is most welcome. I appreciate your assistance in accessing the much needed information.
Thanking you in advance.