A Dissertation Report Submitted to the School of Business in Partial Fulfillment the of requirements of Mzumbe University’s Masters Degree in Accounting and Finance (Msc AF)Foreign exchange exposure has lately been a hot topic since adoption of floating foreign exchange rate consequential from abolishment of the fixed exchange rate system of Bretton Woods in 1970’s. Companies search for suitable hedging techniques to minimize or eliminate the foreign exchange exposure to the institutions in order to improve the financial performance. Therefore, this study aimed at assessing the effectiveness of foreign exchange exposure on improving firms’ financial performance e to the financial institutions operating in Zanzibar. The research methodology used was survey research approach. A sample size of 50 respondents from 10 financial institutions, the methods of data collection involved both primary and secondary sources. The Statistical Package for Social Sciences (SPSS) software and Microsoft Excel program (spread sheet) were used to analyze the data where simple frequencies and percentages on Tables and figures were created to help the presentation of the findings. The main findings indicate that there is inverse relationship of foreign exchange costs and payable to the net income and direct relationship to the net loss of the financial institutions operating in Zanzibar and then the study found that there is direct relationship to the net income and inverse relationship to the net loss of the financial institutions operating in Zanzibar, therefore the study concludes that the flexible of foreign exchange rate has an effect on foreign exchange costs and payables and foreign exchange revenue and receivable to the net income of the financial institutions operating in Zanzibar. In light of the findings, it was recommended that, financial institutions should review their foreign exchange risk managing policies and employ suitable hedging techniques in order to either minimize or eliminate the effect of the foreign exchange exposure on their financial institutions.