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The Role Of Currency Hedging On Firm Performance: A Panel Data Evidence In Indonesia

Author

Listed:
  • Fiskara Indawan
  • Sri Fitriani
  • Indriani Karlina
  • Melva Viva Grace

    (Bank Indonesia)

Abstract

This paper analyzes the role of currency hedging on non-financial firm’s performance. Most firms on the sample have anticipated the currency mismatch risk by balancing the ratio of foreign debt to their asset fenominated in foreign currency. Using panel estimation, we find that there is no evidence of currency hedging activities to affect capital and performance of firms. The result underlines the low intensity of currency hedging activities due to lack of incentives, which is inline with the low derivative transaction within the underdeveloped foreign currency market. This finding may raise a concern since currently the development of foreign liabilities for non-financial firmsin Indonesia is increasing in significant level, as well as the increase risk of domestic currency depreciation. For these reasons, Bank Indonesia should take proactive policies to deepen foreign currency market as well as derivative market by providing a more comprehensive and market friendly hedging instruments to banks and non-financial firms, while keep promoting the benefit of currency hedging.

Suggested Citation

  • Fiskara Indawan & Sri Fitriani & Indriani Karlina & Melva Viva Grace, 2015. "The Role Of Currency Hedging On Firm Performance: A Panel Data Evidence In Indonesia," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 17(3), pages 1-20, January.
    • Handle: RePEc:idn:journl:v:17:y:2015:i:3b:p:1-20
    DOI: https://doi.org/10.21098/bemp.v17i3.39
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    References listed on IDEAS

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    1. Luis Felipe Céspedes & Roberto Chang & Andrés Velasco, 2004. "Balance Sheets and Exchange Rate Policy," American Economic Review, American Economic Association, vol. 94(4), pages 1183-1193, September.
    2. Aghion, Philippe & Bacchetta, Philippe & Banerjee, Abhijit, 2001. "Currency crises and monetary policy in an economy with credit constraints," European Economic Review, Elsevier, vol. 45(7), pages 1121-1150.
    3. Kevin Cowan & Erwin Hansen & Luis Oscar Herrera, 2005. "Currency Mismatches, Balance-Sheet Effects and Hedging in Chilean Non-Financial Corporations," Research Department Publications 4387, Inter-American Development Bank, Research Department.
    4. Allayannis, George & Brown, Gregory W. & Klapper,Leo, 2001. "Exchange rate risk management : evidence from East Asia," Policy Research Working Paper Series 2606, The World Bank.
    5. Sahminan, Sahminan, 2006. "Adjustments of the Non-Financial Sector to the Rise in Exchange Rate Volatility and Their Policy Implications in Indonesia," MPRA Paper 95471, University Library of Munich, Germany.
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    Cited by:

    1. Hari Venkatesh & Gourishankar S Hiremath, 2020. "Currency Mismatches In Emerging Market Economies: Is Winter Coming?," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 23(1), pages 25-54, April.

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    More about this item

    Keywords

    Hedging; derivative market; foreign liability;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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