1.1 Introduction
Currency fluctuation refers to changes in the value of one currency against another over a period of time. In Nigeria, fluctuations in the value of the naira against major foreign currencies have important implications for businesses involved in international trade because several transactions are priced or settled in foreign currencies. For shipping and logistics businesses, changes in exchange rates have the potential to affect freight charges, transportation expenses, equipment costs, maintenance expenses and other operating costs. Recent research on Nigeria's shipping industry reported that exchange rate volatility has a relationship with shipping costs and financial performance, showing the importance of foreign exchange conditions to the sector (Irejeh, 2026). Shipping companies play an important role in the movement of goods within and across national borders. Their operations involve several financial commitments, including freight forwarding, sea and air transportation, customs-related services, warehousing and other logistics activities.
As a prelude to other parts of this study, this chapter will discuss the background upon which this study was initiated, the statement of problems that led to this study, the aim and objectives of the study. Others are significance of the study, scope of work, research hypothesis and questions, limitation of the study and definition of terms.
1.2 Background of Study
Historically, currency fluctuation in Nigeria is closely connected with the country's foreign exchange policies and its dependence on international trade. Before 1986, Nigeria operated a largely controlled exchange rate system in which the value of the naira was managed by the government. According to the Central Bank of Nigeria (2003), the exchange rate system before 1986 was associated with an overvalued naira, declining foreign exchange reserves, rising import bills and external payment difficulties. The situation became more serious following the decline in crude oil prices, which reduced the foreign exchange earnings available to the country.
Okika, Udeh, and Okoye (2019) reported that changes in exchange rates have the potential to affect the profitability of businesses because firms involved in transactions that depend on foreign currencies are exposed to changes in their costs and revenues. This issue is particularly important in Nigeria because many business activities are connected to international trade, where the United States dollar is widely used for payments and settlements. When the naira loses value against foreign currencies, businesses that depend on imported goods, foreign services or international transactions are potentially faced with higher costs. Similarly, when the naira gains value, the naira cost of such transactions is potentially reduced.
Shipping companies are businesses that support the movement of goods and people through maritime and related transport services. Their activities include freight transportation, cargo handling, logistics, documentation, warehousing and other services connected with international trade. According to Adenigbo, Mageto, and Luke (2023), the maritime industry is important to Nigeria's economic development because shipping trade supports the movement of imports and exports and connects the country with international markets. In the same vein, Okene, Ibenta, and Nwanna (2023) reported that exchange rate volatility is an important factor in Nigeria's maritime trade because changes in exchange rates are capable of influencing the volume and cost of shipping-related international transactions.
Okika et al. (2019) stated that, exchange rate fluctuation has the potential to affect the profitability of Nigerian firms by influencing their financial returns and operating costs. For shipping companies, profitability is influenced by several factors, including freight charges, fuel expenses, maintenance costs, staff costs, port charges, administrative expenses and foreign exchange costs. Similarly, according to Okene et al. (2023), exchange rate volatility has important implications for Nigeria's maritime trade because shipping activities are connected to international transactions. The researchers examined exchange rate volatility and maritime trade performance using data covering a long period and found that exchange rate movements were relevant to the performance of maritime trade.
The Nigerian business environment makes the issue more noticeable because shipping companies often operate between local and international markets. A company can receive income in naira while some of its expenses are potentially linked to foreign currencies. For example, payments connected with international partners, imported equipment, technology, maintenance services and other overseas obligations can be affected by exchange rate movements. According to the 2023 annual report of Red Star Express Plc, the company was exposed to currency risk arising from differences between the currencies used for sales, purchases and borrowings and its functional currency, which is the naira. The report identified exposure to the United States dollar, British pound sterling and CFA franc and also showed that changes in exchange rates had potential effects on profit or loss.
This study is set against the backdrop of the need to examine the effect of currency fluctuation on shipping companies' profitability, with particular reference to Red Star Shipping Company.
1.3 Statement of Problems
Investigation revealed that currency fluctuation has become a major challenge for shipping companies operating in Nigeria because many shipping-related expenses are linked to foreign currencies, especially the United States dollar. Changes in the value of the naira can increase the cost of vessel operations, equipment, maintenance, port services and other international transactions, thereby putting pressure on company earnings. On the other hand, shipping companies that receive some payments in naira are potentially exposed to reduced profit when the naira loses value against the currency in which their expenses are settled. Additionally, studies have shown that foreign exchange volatility is capable of affecting the financial and operational performance of firms involved in international trade.
Furthermore, the absence or limited use of effective measures such as currency forecasting, foreign currency planning and appropriate risk management strategies is potentially capable of increasing financial losses during periods of sharp exchange rate movement. Additionally, unpredictable currency changes are capable of making long-term financial planning more difficult and reducing the stability of business operations. It is against this backdrop that this study seeks to examine the effect of currency fluctuation on shipping companies' profitability, with particular reference to Red Star Shipping Company.
1.4 Aim and Objectives of Study
The aim of this study is to examine the effect of currency fluctuation on shipping companies' profitability, with particular reference to Red Star Shipping Company.
The specific objectives of this research are to:
- Examine the effect of currency fluctuation on the operating costs of Red Star Shipping Company.
- Determine the effect of currency fluctuation on the revenue of Red Star Shipping Company.
- Examine the effect of currency fluctuation on the profit margin of Red Star Shipping Company.
- Assess the effect of currency fluctuation on the financial planning of Red Star Shipping Company.
- Examine the foreign exchange risk management practices used by Red Star Shipping Company.
1.5 Research Questions
The study came up with research questions so as to be able to ascertain the above stated objectives. The specific research questions for the study are stated below as follows:
- What is the effect of currency fluctuation on the operating costs of Red Star Shipping Company?
- What is the effect of currency fluctuation on the revenue of Red Star Shipping Company?
- What is the effect of currency fluctuation on the profit margin of Red Star Shipping Company?
- What is the effect of currency fluctuation on the financial planning of Red Star Shipping Company?
- What foreign exchange risk management practices are used by Red Star Shipping Company?
1.6 Research Hypotheses
In order to pursue the objective of this study, the following generalized statements have been designed to guide and aids in obtaining the result for the experiment to be conducted. For this work, the null hypothesis will be represented with H0 while the alternative hypothesis will be represented with hypothesis H1.
Hypothesis One
- H0: Currency fluctuation has no significant effect on the operating costs of Red Star Shipping Company.
- H1: Currency fluctuation has a significant effect on the operating costs of Red Star Shipping Company.
Hypothesis Two
- H0: Currency fluctuation has no significant effect on the revenue of Red Star Shipping Company.
- H1: Currency fluctuation has a significant effect on the revenue of Red Star Shipping Company.
Hypothesis Three
- H0: Currency fluctuation has no significant effect on the profit margin of Red Star Shipping Company.
- H1: Currency fluctuation has a significant effect on the profit margin of Red Star Shipping Company.
Hypothesis Four
- H0: Currency fluctuation has no significant effect on the financial planning of Red Star Shipping Company.
- H1: Currency fluctuation has a significant effect on the financial planning of Red Star Shipping Company.
Hypothesis Five
- H0: Foreign exchange risk management practices have no significant relationship with the profitability of Red Star Shipping Company.
- H1: Foreign exchange risk management practices have a significant relationship with the profitability of Red Star Shipping Company.
1.7 Significance of Study
It is believed that at the completion of the study, the findings will provide management with information on the relationship between exchange rate movements, operating costs and profitability, which is relevant to financial planning and cost control. The study will also provide employees with a clearer understanding of how currency changes affect the company's financial operations and business activities.
Furthermore, the findings will provide customers with information on why changes in foreign exchange conditions are capable of affecting the prices of shipping and logistics services. It will also provide documented information on the financial effects of currency fluctuation on a shipping and logistics company, which will be relevant to discussions on foreign exchange and maritime business policies.
Lastly, the study will provide reference material for students and researchers examining exchange rates, shipping operations, business profitability and foreign exchange risk management.
1.8 Scope of Study
The study focuses on the effect of currency fluctuation on the profitability of shipping companies, using Red Star Shipping Company in Lagos State, Nigeria, as the case study. The study covers currency fluctuation, operating costs, revenue, profit margin, financial planning and foreign exchange risk management.
The study is limited to information obtained from relevant staff, company records and other appropriate sources relating to the company's operations.
1.9 Limitations of the Study
During the course of this study, there were some problems encountered which stood as limitations to the research work. Some of the limitations include:
- Delay from respondents: Some respondents delayed the completion and return of questionnaires, which affected the speed of data collection.
- Financial constraints: Limited financial resources affected transportation, printing, communication and other expenses associated with the research.
- Time constraints: The limited period available for the study affected the amount of time devoted to data collection, analysis and follow-up with respondents.
1.10 Definition of Terms
Currency:
Currency refers to the official medium of exchange used within an economy. In this study, it mainly refers to the Nigerian naira and foreign currencies used in international business transactions.
Currency Fluctuation:
Currency fluctuation refers to changes in the value of one currency relative to another over a period of time.
Exchange Rate:
Exchange rate is the value of one country's currency expressed in terms of another country's currency.
Exchange Rate Volatility:
Exchange rate volatility refers to the frequency and size of changes in the value of a currency.
Profitability:
Profitability refers to the ability of a business to generate profit from its operations after meeting its expenses.
Shipping Company:
A shipping company is an organisation involved in the transportation of goods or related maritime and logistics services.
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