Definition and Hedging Techniques

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Definition of Hedging

According to Madura (2000:275) hedging is the action taken to protect a company from exposure to exchange rates. Exposure to fluctuations in the value of tukat is the extent to which a company can be affected by exchange rate fluctuations.

According to Shapiro (1999:144) on a particular hedging currency exposure means an offseting Such estabilishing whatever is lost or gained on the original currency exposure is exactly offset by corresponding gains on foreign exchange loss on the currency hedge.

Hedging in the above definition is a part of the currency exposure that is charting a substitute for exchange rate losses, such losses or gains on the value of the actual origin of the currency exposure can be compared with the gain or loss on the currency exchange rate currency hedge According to Eiteman (2003:171 -174) hedge is the purchase of contracts (including foreign exchange forwards) or tangible good That will rise in value and offset a drop in value of another contract or tabgible good. Hedgers are undertaken to Reduced risk by protecting an owner from loss.

Hedge is the purchase of a contract (including foward exchange) or tangible goods whose value will rise and fall of the value of the loss of contracts or other tangible goods. Hedging actors trying to protect the owner from harm.

Techniques of Short Term Hedging

The techniques usually used in menghedge part or all of their transactions in the short term, described by Madura (2000:322-333), among others:

A. Hedging using futures contracts

Futures contracts are contracts that specify a currency exchange in a certain volume at a specific completion date.

2. Hedging using forwards contracts

A contract between the customer and the bank to make a sale or purchase of currency against other currencies in the future with the rate determined at the time the contract is made.

Foward advantages include:

a) Avoid and minimize the risk of exchange rate

b) Can be made according to customer needs is the goal of foward:

a) foward contracts are used to cover the risk of exchange rate for the purchase / sale of currency in the future

b) If there is a business transaction, forwards contracts can eliminate the currency exposure due to currency exchange rate for the foreseeable future has been set.

c) Calculation of the exact calculation of costs

d) For the purpose of speculation

3. Hedging using money market instruments.

Hedging using money market instruments involves taking a position in the financial markets to protect the position of the debt or receivable in the future.

4. Hedging using options (option) exchange

Option provides the right to buy or sell a specific currency at a specified price during a specific time period. The purpose of this option for hedging.

Techniques of Long-Term Hedging

According to Madura (2000:342-345) There are three techniques that are often used to hedge exposure to long-term, namely:

a) Long-term Contract foward (Long foward)

Long foward foward is a long-term contracts. Just as short-term contracts foward, can be designed to accommodate the special needs of the company. Long foward very attractive to companies that have signed contracts to export or import of long-term fixed-value and protect their long-term cash flow.

b) Currency Swap

Currency Swap is an opportunity for exchanging one currency with another currency at an exchange rate and a specific date by using the bank as an intermediary between two parties who want to do a currency swap. The purpose of the swap are:

A. Structured to cover the risk of exchange rate for the purchase / sale of currency

2. Swap transactions will eliminate currency exposure because of the exchange rate in the future have been set.

3. Exact calculation of the cost calculations

4. For speculative purposes

5. Gapping strategy

Advantages swap:

A. Avoid the risk of currency exchange

2. Not disturb the posts on balance sheet

c) Parallel Loan

Parallel Loan is a loan which involves exchange between two parties, with an agreement to exchange currency back-exchange is the exchange rate and a specific date in the future. Parallel Loan can be identified with the two are combined into a single swap, a swap occurs at the beginning of the loan contract and the other parallel to a given date in the future.