Corporate Foreign Exchange Risk Management: The Role of Forward Contracts in Mitigating USD/IDR Volatility
DOI:
https://doi.org/10.22441/indikator.v10i1.39156Keywords:
Forward Contract, Value and Risk, Currency Risk, Variance-Covariance, USD/IDRAbstract
This study analyzes the effectiveness of forward contracts as a hedging instrument in reducing USD/IDR exchange rate risk at PT Krakatau Steel (Persero) Tbk. The company reports in USD while most of its revenue is generated in Indonesian Rupiah, creating exposure to exchange rate fluctuations. The study applies the parametric Value at Risk (VaR) method using the variance-covariance approach based on daily USD/IDR JISDOR exchange rate data from Bank Indonesia during 2023 (239 trading days). A debt exposure of USD 1,000,000, converted using the year-end exchange rate of Rp15,439/USD, is used as the basis for the analysis. The results show that the unhedged 20-day VaR at a 95% confidence level is Rp435,009,418, equivalent to 2.82% of the exposure value. Hedging simulations with different hedge ratios indicate that a full hedge (100%) theoretically eliminates exchange rate risk, while a 50% hedge ratio reduces VaR by approximately 75%. These findings demonstrate that forward contracts are effective in mitigating exchange rate risk, with greater risk reduction achieved as the hedge ratio increases. The study provides practical insights for corporate treasury management in managing foreign currency liabilities and supporting more effective financial risk management.
References
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Ririh Windayu, C. (2024). Forward Contract Hedging Analysis as a Protection Effort Transaction Exposure (Case Study at PT. Akasha Wira International, Tbk) (Vol. 5, Number 2). https://ijble.com/index.php/journal/index
Ririh Windayu, C. (2024). Forward Contract Hedging Analysis as a Protection Effort Transaction Exposure (Case Study at PT. Akasha Wira International, Tbk) (Vol. 5, Number 2). https://ijble.com/index.php/journal/index
Risman, A., Salim, U., Sumiati, S., & Indrawati, N. K. (2017). Commodity Prices, Exchange Rates and Investment on Firm's Value Mediated by Business Risk: A Case from Indonesian Stock Exchange. In European Research Studies Journal: XX.
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