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Director
Task Force of Financial Deepening
Bank Indonesia
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Jakarta, 20 May 2015
Deloitte Seminar
Hedging: The Benefits and Implementation Challenges in Indonesia
20 May 2015, Hotel Indonesia Kempinski Jakarta
3
‘Why do companies hedge?’ The most important reason cited in the survey was ‘to
reduce the volatility of the cash flows’. Next in importance was, ‘maximising
shareholder value’; and then, ‘reducing volatility of reported accounting
earnings’.
Business Risks Market Risks Liquidity Risks Credit Risks Operational Risks
As market imperfections are more of a norm, than exception, it makes risk mitigation an imperative
exercise. The significance of hedging arises due to the omnipresence of various risks faced by all
stakeholders.
Deloitte Seminar
Hedging: The Benefits and Implementation Challenges in Indonesia
20 May 2015, Hotel Indonesia Kempinski Jakarta
5
Benefits of hedging
A spate of literature has been written justifying the significance of hedging theories,
reinstating the motives and benefits of hedging
1. Price Risk Insurance theory : Hedging acts as an insurance against price risk
• Smith (1922), Marshal (1919), Keynes (1930), Hicks (1939) and Kaldor (1939)
2. Portfolio theory : Hedging is primarily used for insuring against risks, but it
integrates risk avoidance with expected profit maximisation
• Stein (1961) and Johnson (1960) to explain hedging to mitigate risk and earn returns
3. Hedging ensures continuity of cash flows
• Companies, by choosing to hedge, can bring about certainty in their production
process, and ensure continuity of cash flows
4. Hedging encourages capital investment
• By locking input prices, firms are able to protect themselves against the rising
operating costs, and therefore, make concrete plans on capital formation and
expansion
5. Hedging for enhancing a firm’s value
• In the overall strategy of management, reducing corporate risk is an essential
feature. By helping reduce costs stemming from market imperfections, hedging
enhances a firm’s value.
Deloitte Seminar
Hedging: The Benefits and Implementation Challenges in Indonesia
20 May 2015, Hotel Indonesia Kempinski Jakarta
7
Opportunity Gain/Loss
In FX Hedging
Opportunity
Gain
Opportunity Loss
(Biaya Hedging)
Deloitte Seminar
Hedging: The Benefits and Implementation Challenges in Indonesia
20 May 2015, Hotel Indonesia Kempinski Jakarta
9
10
Banks’ Capacity to
Prudential policy for engage in FX
Demand for FX
managing FX risk of Derivative and Provide
Hedging
private external debt FX Line
Adequate risk
management
Developing Active and Resilient FX
Derivative Market for Hedging • Potential Credit
Exposure (Limit)
• Interbank Credit
Line
Deloitte Seminar
Hedging: The Benefits and Implementation Challenges in Indonesia
20 May 2015, Hotel Indonesia Kempinski Jakarta
11
The US Dollar
Super-cycle
(the Fed Exit Policy)
Prudential Policy for Private
External Debt
12
Deloitte Seminar
Hedging: The Benefits and Implementation Challenges in Indonesia
20 May 2015, Hotel Indonesia Kempinski Jakarta
13
18.000
14.000
12.895
12.150 12.260
12.000
10.755
10.000
8.710 8.460
8.000
6.000
Crawling peg
4.000 Free Float
2.485
2.000 2.105
14
%
30,00
27,01
25,00
20,84
20,00 18,91
15,00
14,56
12,73 12,49
10,98
10,36 9,90
10,00
6,08
5,00 4,30
-
IDR INR MYR KRW PHP THB PLN TRY ZAR MXN BRL
Deloitte Seminar
Hedging: The Benefits and Implementation Challenges in Indonesia
20 May 2015, Hotel Indonesia Kempinski Jakarta
15
Monthly FX Supply-Demand
$22 Bio
20
10
-
(1) (0) (1) (0) 0
(2) (2) (1) (1)
(3) (3) (2) (3) (2)
(3) (3)
(10)
(20)
$23.7 Bio
(30) Demand $
16
NET-ONSHORE DEMAND-SUPPLY
4,0 NET-CAPITAL FLOWS
4
3,0 3
Supply $
2,0
$1.35 bio
1,0
0,0
-1,0
-3,0
FOMC Demand $
(3) Russia
-4,0
Okt-14
Jan-14
Feb-14
Mar-14
Apr-14
Mei-14
Jun-14
Jul-14
Agu-14
Sep-14
Nov-14
Des-14
Jan-15
Feb-15
Mar-15
Apr-15
Deloitte Seminar
Hedging: The Benefits and Implementation Challenges in Indonesia
20 May 2015, Hotel Indonesia Kempinski Jakarta
17
14.000
12.000
10.000
8.000
6.000 12.784
11.095
4.000
2.000
5.011 4.733
0
Indonesia Philippines Thailand Malaysia
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Korea
Malaysia
Forward
26%
Swap Spot
41%
Spot
43%
Indonesia 46%
Forward Swap
16% 28%
Swap
28%
Swap
Spot Swap Spot
49%
43% 46% 41%
Forward
8% Forward
13%
Deloitte Seminar
Hedging: The Benefits and Implementation Challenges in Indonesia
20 May 2015, Hotel Indonesia Kempinski Jakarta
19
Billion $
4,5
Spot Swap Forward Option
4,0
3,5 Spot
$3.03 billion
3,0
2,5
2,0
1,5 Swap
$1.03 billion
1,0
0,5 Forward
$0.2 billion
0,0
20
Deloitte Seminar
Hedging: The Benefits and Implementation Challenges in Indonesia
20 May 2015, Hotel Indonesia Kempinski Jakarta
21
2001 - 2013
Pembatasan
Pembelian Transaksi
Transaksi Transaksi
Valas Valas
Rupiah dan Valas Lindung
Pemberian
Terhadap Terhadap 7 PBI
Rupiah Nilai Kepada
Kredit Valas oleh Rupiah
Bank
Kepada Bank
(2 PBI & 3
Bank
= 12 SE
(1 PBI & 3 SE) (1 PBI & 1 SE)
(3 PBI & 3 SE) SE)
Nov 2014
Bank dengan Bank dengan
Pihak Domestik Pihak Asing 3 PBI
1 PBI
1 SE Eks
1 PBI 1 PBI
1 SE Eks 1 SE Eks
3 SE Ekst
PBI No. 16/16/PBI/2014 PBI No. 17/16/PBI/2014
22
Deloitte Seminar
Hedging: The Benefits and Implementation Challenges in Indonesia
20 May 2015, Hotel Indonesia Kempinski Jakarta
23
30 Minutes Interval
Requirement to
End of Trading Day
Maintain Bank Net
Bank-NOP Max 20% of
Open Position (NOP)
capital
of Max 20% of
capital
24
Deloitte Seminar
Hedging: The Benefits and Implementation Challenges in Indonesia
20 May 2015, Hotel Indonesia Kempinski Jakarta
25
Derivative
Exposure (Limit)
26
Bank that provide Cross Currency Swap (CCS) Line to its customer
must fulfil the following requirements :
1. Have internal guidelines, among others include accounting, skilled human
resources, support systems, and risk management, approved by the bank's
management
PBI No. 11/25/PBI/2009 tentang Penerapan Manajemen Risiko Bank Umum
Deloitte Seminar
Hedging: The Benefits and Implementation Challenges in Indonesia
20 May 2015, Hotel Indonesia Kempinski Jakarta
27
DERIVATIVE
DERIVATIVE BANK
BANK NON- BANK
INDONESIAN CONTENTS ?? :
1. Local Regulation
2. Law Jurisdiction Option
3. Bilingual
28
Deloitte Seminar
Hedging: The Benefits and Implementation Challenges in Indonesia
20 May 2015, Hotel Indonesia Kempinski Jakarta
29
Forward An over-the-counter (OTC) instrument; • Customised contract between the two parties, in
terms of size, quality and delivery date; • Usually involves no ‘upfront’ payment and ‘cash’
changes hands only at the expiry of the contract;
Option Helps to lock-in the price but without the compulsion to honour the contract, especially to
benefit from favourable price movements; • No margin calls for options buyers; • Risk is limited
for the buyer of options, contract, i.e., he/she can at the most lose the contracts premium; •
Options can be exercised or offset before expiration
Future Standardised contract in terms of contract size, delivery dates, quality, trading hours, tick size,
and maximum daily price limits; • Exchange traded; hence, zero counterparty risk; • Involves a
‘down payment’ known as the initial margin ; • Transparent pricing •
Deloitte Seminar
Hedging: The Benefits and Implementation Challenges in Indonesia
20 May 2015, Hotel Indonesia Kempinski Jakarta