VALUE-AT-RISK BASED APPROACH FOR CURRENCY HEDGING

Corporate FX risk management has gained complexity with an increased number of currencies involved and varying correlations among them. Existing literature has highlighted the need to account for cross-currency correlations when optimizing hedge ratios for portfolio management (Dowd, 1999). In this paper, we propose a Value-at-Risk (VaR) based model to estimate the optimal hedge ratio for a multi-national corporate that aims to minimize the cost of hedging at a given tolerance level of expected loss arising out of FX movement. The paper illustrates both parametric and historical methods of VaR estimation at a portfolio level as the first step in risk management. As a second step, an efficient-frontier is derived based on the expected VaR level at various hedge ratios and compared with associated hedge cost. The benefits of this approach include: identification of net exposures after correlations among currencies are accounted for in order to avoid duplication of hedges, and condensation of the parameters governing hedging decision into a single, intuitively-appealing number. The paper also highlights the need to frequently update the model’s assumptions as currency correlations and corporate exposures remain dynamic. JEL Classification Codes: C10, F31, G32, M20.

The inflation hedging capacity of Islamic and conventional equities

PurposeThis study analyzes the inflation hedging of Islamic and conventional equities by employing 26 indices for the period ranging from January 1996 till August 2018. The authors investigate the decoupling hypothesis for Islamic versus conventional equities across various investment horizons.Design/methodology/approachThe authors employ a vector autoregressive framework coupled with bootstrapping procedure to compute inflation hedging measures. The hedging measures employed account for the inflation hedging capacity in terms of hedging effectiveness as well as the cost of hedging (efficiency). The authors account for various investment horizons ranging from one month to ten years.FindingsAlthough, the authors do not find consistent evidence for the decoupling hypothesis of Islamic and conventional equities in terms of their inflation hedging capacity. However, the authors document that certain Islamic equity indices can be employed to effectively hedge against the risk of inflation.Originality/valueThe main contribution of this study is that the existing literature on the comparative performance of Islamic versus conventional equities against inflation risk is sparse. The purpose of this study is to analyze the inflation hedging attributes of Islamic versus conventional equities, that is, whether Islamic equities render better real returns than their conventional counterparts. It will contribute to the growing literature on the comparison between Islamic and conventional equities by documenting the real return attributes of these two, apparently different, assets. A further contribution is that in order to account for the different investment horizons for different types of investors, this study will quantify the real return attributes of Islamic and conventional equities for short-, medium- and long-term investors.

The additional cost of hedging in foreign currency loans

Foreign currency denominated loans ( FCDLs) are an important part of corporate funding as well as an operational risk management tool. We show that domestic borrowers use FCDLs to hedge their foreign exchange risk exposure. FCDLs are found to carry an interest rate premium over domestic currency loans after controlling for borrower characteristics, loan characteristics, and macroeconomic conditions. We argue that borrowers are willing to pay this premium since the marginal benefit of FCDLs as a natural hedge outweighs the marginal cost. From a lender’s perspective, this premium reflects a compensation for additional foreign exchange risk exposure and intensified monitoring efforts. These results are robust to endogeneity-corrected estimations. JEL Classification: G21, G32

ANALISIS PENGELOLAAN VALUTA ASING TERHADAP PROFITABILITAS PT GARUDA INDONESIA (PERSERO) TBK

In 2013 the company also invested large amounts in the form of additional fleets to support operational improvements financed with foreign currency debt. For the use of these debts, the company must pay the credit debt periodically. The decline in the rupiah against the US dollar led to a growing number of rupiah funds should be spent. This study aims to determine how the management of foreign exchange through the method of hedging against the profitability of the main indicators of profit or loss on foreign exchange of PT Garuda Indonesia (Persero) Tbk using secondary data such as financial statements and annual report of PT Garuda Indonesia (Persero) Tbk and spreads forward and call spread option. The analytical method that used is the method of simulation on alternative methods of hedging foreign exchange rates. Results of the study revealed that the cross currency swap contracts held by the company in 2014 have shown positive results where PT Garuda Indonesia (Persero) Tbk can make a profit of USD 29 770. Because financially, hedging is only intended to protect the interest payments on loans and credit bond investment, the company still has the potential to bear the profit or loss on the change in exchange rates other operations against the US Dollar.Keywords: Management of foreign exchange, cross bilateral swap transaction, forward contracts, call option, the cost of hedging, profitability, and profit and loss on foreign exchange.