International Journal of Administration and Governance

Transcription

1 International Journal of Administration and Governance ISSN (1): RSEARCH ARTICLE Decision Making On Selecting Currency Hedging Instrument Case Study: PT INDOENERGIA Rani Fatmawati SE, Ak. Master of Business Administration Program, Institut Teknologi Bandung, Indonesia Address For Correspondence: Rani Fatmawati SE, Ak., Master of Business Administration Program, Institut Teknologi Bandung, Indonesia Received 3 March 2017; accepted 23 May 2017; published 20 June 2017 A B S T R A C T The study is to present the decision making process on selecting currency hedging instrument during of first year implementation phase for non-bank corporation. The study case company is PT INDOENERGIA, a non-bank, state-owned, net importer company which exposed to periodic currency hedging. Having implemented currency hedging for more than a year, the corporation is exposed to negative impact of currency hedging on its financial statement performance. Based on root cause analysis conducted, it is concluded that the absence of hedging instrument portfolio become the most significant factor contributed to the problem. Currently forward instrument is the only hedging instrument implemented in the corporations. By reconstructing the decision making process on selecting the currency hedging instrument alternatives provided by the regulations, it enable the company to implement others hedging instrument while minimizing the negative impact of currency hedging transaction to financial statement performance. SMART, as a qualitative decision making tools, was used on the decision making process. Combination of forward and options in the regular corporate hedging portfolio and adopting swap in the irregular in relatively minor volume is the result of the SMART analysis. Key words: decision making, currency hedging instrument, forward, options and swaps. INTRODUCTION PT INDOENERGIA has high exposure of currency risk on fulfilling high demand of USD liability, fund outflow in USD while its fund inflow majority dominated in IDR lead to obligation on implementing the currency hedging transaction since Having regulated by the central bank on implementing currency hedging,currently PT INDOENERGIA focused on mitigating financial risk on fulfilling corporate s liability in USDduring the settlement period of hedging transaction which impacted on financial statement performance. Business Issue Exploration: Being complied on hedging mandatory regulation doesn t secure PT INDOENERGIA from being exposed on currency risk during settlement date. During hedging settlement date, PT INDOENERGIA exposed for financial statement loss when hedging contract rate is above market rate. Having financial risk and insurance department limit the level of financial statement loss for certain amount of tolerable financial loss in annual basis, developing risk mitigation plan will be crucial issue. Negative impact currency hedging transaction on financial statements consider as financial risk which need to be mitigated. Open Access Journal This work is licensed under the Creative Commons Attribution International License (CC BY). ToCite ThisArticle: Rani Fatmawati SE, Ak., Decision Making On Selecting Currency Hedging Instrument Case Study: PT INDOENERGIA. Int. J. Adm. Gov, 3(1): 22-26, 2017

2 23 Rani Fatmawati SE, Ak., 2017 Business Issue Exploration: The decision making process on selecting currency hedging instruments based on decision makers analysis and assessments as well as their knowledge on each currency hedging natures of transaction. It will be based on qualitative approach which integrating research questions, data, data analysis in order to discover the best suitable solution forbusiness problem. Fig. A1: Root Caused Analysis Decision making tools such as cause and effect or Ishikawa diagram will define the most significance cause which contributing to negative impact on financial statement such as uncontrollable loss during currency hedging implementation.the trend of financial loss during currency hedging settlement derived from four causes and sub causes, mentioned as follows: Mandatory Regulation - Currency Hedging Implementation: Based on central bank regulation, PBI No.16/20/PBI/2014, PT INDOENERGIA has obligation on implementing hedging transactionperiodically. According to its nature as net importer corporation, the corporationhasperiodic negative balance of foreign currency asset and foreign currency liability.it is mentioned onchapter 1 Article 6, type of hedging instruments allowed by the regulation is forward, swap, and option instrument. On the article 3, it was mentioned that for non-bank corporation which fulfil the hedging mandatory criteria should minimum hedge its exposure at 25% (twenty-five percent) of the negative balance between foreign currency assets and foreign currency liabilities with a maturity period up to 3 (three) months or 3 (three) months to 6 (six) months ahead from the end of the quarter period. Hedging Implementation: Currently, PT INDOENERGIA has only adopting one hedging instrument, named forward. Forward is selected from two others alternatives given by central bank, options and swap. It was acknowledged from the management interviewed that the past decision making process on selecting forward as hedging instrument was based one criteria which based on one department judgement rather than systematic decision making process. It only consider criteria such as transactional simplicity rather than holistic analysis. Financial Statement Standard: Based on IAS 39 and PSAK 55, settlement of hedging transaction will be marked to market in order to obtain its fair value.mark to market in hedging settlement is the level for denoting or relating to a system of valuing forward position by the most recent market price. Mark to market of hedging transaction will impact for gain or loss in corporate financial statement.jakarta Interbank Spot Rate or mentioned as JISDORis reference rate for daily foreign exchange market transaction in domestic market. During the settlement period, when

3 24 Rani Fatmawati SE, Ak., 2017 forward rate higher than daily reference rate (JISDOR), it will impact to loss on financial statement. Moreover, since there is no hedging instrument portfolio, position of forward buy USD in the trend of IDR strengthening against USD may contribute to loss in financial statement of income and led to less optimum cash flow management. Macroeconomy Factor: The trend of USD/IDRvolatility over the last two years become one of major factor for mandatory hedging implementation for non-bank corporation in Indonesia. High amount external debt denominated in USD is the source of financing development utilized in Indonesia. High volatility of domestic currency against USD lead to potential adverse effect in the national economy, similar to had occurred in the 1997/1998 crisis. According to central bank regulation 16/21/PBI/2014,private external debt risk escalates due to risk factors stemming from theglobal economy in the form of tighter global liquidity along with economicdownswings in emerging market countries and persistently low internationalcommodity prices.such circumstances have reduced the capacity to repay (increased the risk of default) of private nonbank corporations. The majority of private non-bank corporation s external debts are not hedged its external debt position. High level of volatility and global economy downturn lead to higher level of unpredictability. All this aspect are consider uncontrollable for the corporation. Compare to other causes, such as macro economy, regulation and financial statement standard, hedging implementation considers as controllable and significantly contributed to the effect. Sub cause such as singe hedging instrument and position applied, such as forward buy USD is the main contributor for negative impact on financial statement. SMART Decision Making Tools: SMART decision-making tools will split the problem into small parts and focus on each part separately. This step will clarify the process of decision making by acquiring a better understanding of the problem, which would be achieved by taking holistic view. SMART will encourages the decision maker to think deeply about the problem, enabling a rationale. After analysis process the decision maker should be able to explain and justify why a particular hedging instrument to be favored on validation question in the questionnaire. This analysis enables decision maker to gain better understanding on decision making process, criteria andlevel of importance among criteria. First step is selecting criteria through focus group discussion of respondents group who having deeper understanding on the nature of currency hedging transaction. Second step is defining level of importance of each criteria selected by respondent group two who have more general understanding of each criteria given. Third step is the judgment of each hedging instrument based on criteria weighted result in level of judgment of currency hedging based on its level of implementation in the corporation to develop currency hedging portfolio. Table A1: SMART Analysis for Forward Instrument

4 25 Rani Fatmawati SE, Ak., 2017 Table A2: SMART Analysis for Swap Instrument Table A3: SMART Analysis for Swap Instrument Selecting provisional judgement defined as developing the hedging portfolio based on the output of SMART decision making process. Hedging portfolio instruments develop in the corporation will be based on SMART output percentage. The highest the percentage will indicate the level of benefit of each currency hedging for the corporation. SMART result is consider forward instrument as the biggest portion of hedging instrument to be implemented in PT INDOENERGIA, followed by options and swap. Business Solution: The combination of forward and option may optimize the performance ofcurrency hedging implementation in PT INDOENERGIA. Forward instrument is selected as the biggest portion in term of volume as its highest liquidity in domestic market and relatively lower price compare than options. While option gives the right for not executing committed hedging transaction on the unfavorable hedging settlement period. It will be suitable to be implemented in the high trend of market volatility.having more than one hedging instruments give more alternatives for corporation on generating the best hedging strategy based on some proportions. Combining different proportion of currency hedging instrument due to different periodic hedging implementation will give flexibility for corporationon adjusting to current market condition. Conclusion: As a result, options and swap can be implemented for some circumstances to be the best hedging instrument to be implemented in PT INDOENERGIA as component of hedging instrument portfolio. The combination of forward and option may optimize hedging implementation for PT INDOENERGIA, while swap may be implemented in the extra ordinary condition in relatively smallest portion compare to others.having forward and option currency hedging instrument within corporate hedging portfolio may reduce the negative impact on financial statement performance. The corporation decision on selecting options and swaps as new hedging instruments will not only mitigate the negative impact on corporate s financial statement performance but also may deepening the financial domestic market, since higher demand leads to higher liquidity in term of supply. It gives positive impact on better hedging instrument price in domestic market as well. REFERENCES Bank Indonesia, 2012, Bank Indonesia Regulation,16/20/PBI/ 2014,The Implementation of Prudential Principles in Managing External Debt of Nonbank Corporation Brian Coyle, Currency Risk Management, Currency Swaps, Financial World Publishing, The Chartered Institute of Bankers

5 26 Rani Fatmawati SE, Ak., 2017 Brian Coyle, Currency Risk Management, Introduction to Currency Risk, Financial World Publishing, The Chartered Institute of Bankers David A. Moss, A Concise Guide to Macro Economics, Harvard Business School Press International Accounting Standard, 2014, Number39, Fair Value Max H. Bazerman & Don A. Moore,2009.Judgment in Managerial Decision Making, John Wiley & Sons, Inc. MenteriBadan Usaha Milik Negara Republik Indonesia, Nomor Per-09/MBU/2013 TentangKebijakanUmumTransaksiLindungNilaiBad an Usaha Milik Negara Uma Sekaran and Roger Bougie, Research Methods for Business, A Skill Building Approach, John Wiley & Sons, Inc.