Thursday, 19th March 2009, the Directorate of Reserve Management (DPD) of Bank Indonesia hosted a seminar entitled “Philosophy and Practical Guidance of Currency and Interest Rate Hedging”, officially opened by the Deputy Governor of Bank Indonesia, Budi Mulya. The speaker at the seminar was Ian H. Giddy, Finance Professor from New York University’s Stern School of Business, USA.
Many representatives attended the seminar from BPK, Depkeu, KPK, PPATK, BPKP, Perbanas, IBI, IAI, STAN, Pertamina, Indosat, PLN, BP Migas and Ministry of BUMN. Budi Mulya explained that the seminar was particularly beneficial in building common understanding on the concept of derivative transactions for hedging purposes, including the effect of such transactions on risk management strategy and accounting. He also emphasized the importance of studying hedging transactions through a philosophical approach so that a sound foundation is established in terms of understanding hedging derivative transactions and the related aspects more thoroughly. He also took the opportunity to explain that hedging is one of the crucial instruments in managing a portfolio, especially to mitigate risk that arises from uncertainty surrounding market price fluctuations.
Ian Giddy, an international expert in finance, as academic and practitioner alike, stated that hedging can reduce market price risk stemming from unpredictable market price fluctuations. The risk that has to be hedged is market risk not business risk. Business risk such as marketing or production capacity cannot be hedged. One of the principles emphasized by Professor Giddy was that hedging should not be performed based on the view of currency movements and/or the future interest rate. Therefore, hedging remains simple and not complicated because it is performed on the entire exposure. Volatility eases when hedging instruments match the exposed asset or liability. Therefore, hedging cannot be based on expectations or trends, hedging must protect investors no matter where currency movements lead.
Hedging can only be performed should an entity know its own exposure and understand the effectiveness of its hedging instruments (Forwards, Futures, Swaps, and Options). If an entity is exposed but accurately know its exposure level, the entity should perform full hedging (100%). Partial hedging can be used but is inaccurate if risk exposure is known and quantifiable. The effectiveness of hedging can be measured but has to be seen from two sides; the hedged item and its hedging instrument.
Giddy also explained that hedging is a part of risk management. Therefore, an entity must be aware of its risk exposure first, followed by measuring risk exposure and implementing a hedging strategy. The supervision method should also be set to control and supervise the effectiveness of risk management. Financial institutions require a hedging framework and risk management that is clear and transparent.
The Director of DPD, Rasmo Samiun, who acted as moderator, added that common attractiveness and attention among market players, auditors and regulators in derivative transactions for hedging purposes requires a common perception of such transactions, especially during periods of intense market volatility that could trigger downward pressure on asset and liability value such as now. The seminar also provided greater understanding based on best practices/concepts that are accepted internationally, which will improve Good Governance.
Many representatives attended the seminar from BPK, Depkeu, KPK, PPATK, BPKP, Perbanas, IBI, IAI, STAN, Pertamina, Indosat, PLN, BP Migas and Ministry of BUMN. Budi Mulya explained that the seminar was particularly beneficial in building common understanding on the concept of derivative transactions for hedging purposes, including the effect of such transactions on risk management strategy and accounting. He also emphasized the importance of studying hedging transactions through a philosophical approach so that a sound foundation is established in terms of understanding hedging derivative transactions and the related aspects more thoroughly. He also took the opportunity to explain that hedging is one of the crucial instruments in managing a portfolio, especially to mitigate risk that arises from uncertainty surrounding market price fluctuations.
Ian Giddy, an international expert in finance, as academic and practitioner alike, stated that hedging can reduce market price risk stemming from unpredictable market price fluctuations. The risk that has to be hedged is market risk not business risk. Business risk such as marketing or production capacity cannot be hedged. One of the principles emphasized by Professor Giddy was that hedging should not be performed based on the view of currency movements and/or the future interest rate. Therefore, hedging remains simple and not complicated because it is performed on the entire exposure. Volatility eases when hedging instruments match the exposed asset or liability. Therefore, hedging cannot be based on expectations or trends, hedging must protect investors no matter where currency movements lead.
Hedging can only be performed should an entity know its own exposure and understand the effectiveness of its hedging instruments (Forwards, Futures, Swaps, and Options). If an entity is exposed but accurately know its exposure level, the entity should perform full hedging (100%). Partial hedging can be used but is inaccurate if risk exposure is known and quantifiable. The effectiveness of hedging can be measured but has to be seen from two sides; the hedged item and its hedging instrument.
Giddy also explained that hedging is a part of risk management. Therefore, an entity must be aware of its risk exposure first, followed by measuring risk exposure and implementing a hedging strategy. The supervision method should also be set to control and supervise the effectiveness of risk management. Financial institutions require a hedging framework and risk management that is clear and transparent.
The Director of DPD, Rasmo Samiun, who acted as moderator, added that common attractiveness and attention among market players, auditors and regulators in derivative transactions for hedging purposes requires a common perception of such transactions, especially during periods of intense market volatility that could trigger downward pressure on asset and liability value such as now. The seminar also provided greater understanding based on best practices/concepts that are accepted internationally, which will improve Good Governance.
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