Philosophy and Practical Guidance of Currency and Interest Rate Hedging

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.

BI drops key rate to 7.75 percent

Bank Indonesia (BI) has reduced its key interest rate by 50 basis points to 7.75 percent, as part of efforts to help the banking sector cope with worsening impacts of the global financial downturn, kompas.com reports. On Wednesday, BI strategic planning and communication bureau head Didy Laksmono R. said that before deciding to reduce the rate, BI had evaluated the performance of the domestic and global economies. 
“Inflation pressure was relatively low – at 0.21 percent – during February, thanks to lower fuel prices and availability of food supplies,” Didy said. 
The lower prices of international commodities were another factor causing the low inflation pressure, he added.
Bank Indonesia said in a statement the economic slump was "taking a steeper turn" and developing countries were being hit by a fall in exports and negative market sentiment.
Indonesia's exports fell 36 percent in January from a year earlier, the biggest drop since 1986, due to plunging demand for natural resources and manufactured goods, the statistic's agency reported Monday. It was the fourth straight month the central bank has cut the rate, lowering it a total of one and three quarter points from 9.5 percent since early December. Indonesia had been struggling to bring down inflation topping 10 percent, but that figure slowed to 8.6 percent on year and 0.2 percent month-on-month in February, the bank said. The central bank forecast a slowdown in economic growth to 4 percent in 2009, from an estimated 6.1 percent in 2008, "with considerable downside risk if global economic growth worsens even more than expected."At the same time, Indonesia's banking system - which collapsed just over a decade ago in the Asian financial crisis - was in "stable condition," the bank said. International reserves stand at $50.56 billion, with an additional $3 billion 

SOurce: The Jakarta Post , Jakarta | Wed, 03/04/2009 4:50 PM | Business

Oil and coal mining firms pollute Balikpapan Bay

The Balikpapan Bay is one of the city's landmarks, a place where foreign and domestic companies, mostly in the coal and oil sectors, have been carrying out their business for dozens of years. 

It is also a place that traditional fishermen and small-scale businesses rely on for their livelihood. 

However, the companies have not paid enough attention to the environment and the water quality in the Balikpapan Bay is deteriorating. 

The Office of the State Minister of the Environment's Kalimantan Regional Environmental Management Center (PPLH) has noted that oil, gas and coal production had played a significant role in polluting the bay. 

"The exceeded level of phenol indicated the presence of pollution caused by oil refineries and the coal oxidation process," B. Widodo, PPLH head, told The Jakarta Post. 

Pollutants in the bay area also originated from domestic activities, pesticide use in agriculture, fuel leaks in ships and other activities using organic chemicals. 

"Domestic waste has also contributed significantly to the problem," Widodo said. 

"These activities have further increased the phenol, or the carbolic acidic level of water, indicating that spatial planning around the Balikpapan Bay should be reviewed immediately. 

"The rising level of phenol is attributed to activities at the coal docks, oil refineries, domestic activities and shipping traffic." 

The PPLH conducted a water quality analysis in the Balikpapan Bay on Dec. 6 last year and took water samples from a number of observation points, such as at the Semayang Port, the Penajam Port, Baru village and the oil refinery of state-owned oil and gas company Pertamina. 

According to Widodo, the water quality test referred to the Environmental Ministerial Decree No. 51/2004 on field parameters, comprising the water alkaline level, the turbidity, dissolved oxygen and temperature. 

Based on lab tests, the turbidity and temperature at Pertamina's waste water cooling outlet had exceeded tolerable levels. 

Analysis indicated that total suspended density (TSS) and phosphate content at every observation point had surpassed tolerable levels. 

The highest concentration of TSS was at the Semayang Port and the highest concentration of phosphate was at Pertamina's waste outlet. 

The high water temperature near Pertamina's waste outlet was caused by the high temperature of waste water that flows from their cooling towers into the sea. 

"The oil refinery contributed to these environmental problems. Pertamina should improve its environmental management, especially its waste cooling system, which have made it harder for everyone to cope with this environmental damage," Widodo said. 

He added that the high levels of TSS and phosphate at every observation point indicated a high level of pollutants, especially those from domestic waste. 

He said the level of phosphate was a concern because it could cause algae booming, which has also occurred in the Jakarta Bay and reduced water quality by limiting oxygen content and decimating marine life. 

"This is an early warning sign so stakeholders can coordinate with the local administration and other related agencies to prevent environmental damage," Widodo said. 

Meanwhile, Balikpapan Pertamina spokesperson Fety said water quality at the oil refinery continued to meet the required standard. 

"We always measure the water standard every day and report it to the Balikpapan Environmental Impact Management Agency," she said. 

"The water quality still meets the port's standards and there are no leaks at the oil refinery or with the cooling process. 

"However, we are grateful to the PPLH for the warning and we will take action immediately." 

Fety added that Pertamina used the water standard parameter for the port while PPLH used the standard for marine tourism.

Source: Nurni Sulaiman , The Jakarta Post , Balikpapan | Fri, 01/30/2009 3:13 PM | The Archipelago