Assessing the application of Islamic and conventional hedgings in Indonesia

Purpose Banks in Indonesia offer two currency-hedging mechanisms to business players to hedge their portfolio against exchange rate risk, namely, Islamic hedging and conventional hedging. Taking into account that Islamic finance stakeholders in Indonesia want to accelerate Islamic hedging transactions, assessing the feasibility of Islamic hedging to serve the business players is very important. Thus, this paper aims to compare the conventional and Islamic currency-hedging mechanisms, particularly to identify which one to be preferred by the business players, identify terms and conditions if Islamic hedging is more preferable, give information regarding the estimated profit and payment of the premium in adopting currency-hedging (both conventional and Islamic hedgings) and prove the workability of Islamic currency-hedging as a new hedging mechanism for the business players. Design/methodology/approach The paper uses qualitative research methodology by comparing Islamic and conventional hedging and a quantitative research method by using a forward contract formula. Technically, the paper conducts a static simulation of the forward transactions by using both conventional and Islamic hedgings to hedge the foreign exchange (forex) credit received by business players from banks. The forward contract simulation uses US dollar (USD) against Indonesian rupiah (IDR) from December 2003 to February 2019 and the forward premium uses both Islamic and conventional money market rates called PUAB (conventional interbank money market) rate and PUAS (Islamic interbank money market) rate. Findings The paper finds that Islamic hedging is more preferable to conventional one due to some considerations which are the number of profitable months, the minimum payment of premium and the highest payment of profit. However, even though the Islamic hedging mechanism has the advantage of having a higher Islamic money market rate than the conventional one, the economic condition (particularly the movement of IDR exchange rate) has to be considered as well particularly during the volatile exchange rate movement. Research limitations/implications The paper has not occupied macroeconomic variables such as inflation, GDP, international trade, as they might influence the movement of IDR exchange rate. In addition, it uses static simulation rather than a dynamic one. Originality/value This is the first paper assessing both Islamic and conventional hedging mechanisms in the case of Indonesia

Essays on the forward premium bias

O στόχος αυτής της διδακτορικής διατριβής είναι να παράσχει νέες πληροφορίες για την εξήγηση του παζλ του προθεσμιακού ασφαλίστρου (forward premium puzzle), και την ικανότητά μας στην πρόβλεψη των συναλλαγματικών ισοτιμιών. Μετά από μια σύντομη ανασκόπηση της καλυμμένης, ακάλυπτης ισοτιμίας επιτοκίου (CIRP, UIRP) και μερικές από τις πιο δημοφιλείς εξηγήσεις του παζλ του προθεσμιακού ασφαλίστρου, η διατριβή παρουσιάζει τρία δοκίμια για να ρίξει φως στο παραπάνω παζλ. Η διατριβή παρέχει πολλά χρήσιμα αποτελέσματα για ακαδημαϊκούς και επαγγελματίες. Πρώτον, δείχνει ότι ένα μοντέλο παλινδρόμησης της διαφοράς των επιτοκίων μεταξύ της εγχώριας και της ξένης χώρας, το οποίο προσαρμόζεται για την επίδραση του ασφαλίστρου κινδύνου συναλλαγματικής ισοτιμίας, μπορεί εύλογα να προβλέψει τις μελλοντικές μεταβολές στις συναλλαγματικές ισοτιμίες. Δεύτερον, αποδεικνύει ότι το προθεσμιακό ασφάλιστρο, που ενσωματώνεται στη διαφορά των επιτοκίων, μπορεί με συνέπεια να εξηγεί το μεγαλύτερο μέρος της μεροληψίας της διαφοράς των επιτοκίων και της απόδοσης χρονικής περιόδου για την πρόβλεψη μελλοντικών αλλαγών στη συναλλαγματική ισοτιμία. Τρίτον, δείχνει ότι η στρατηγική μεταφοράς συναλλάγματος (currency carry trade strategy), που περιλαμβάνει το δανεισμό σε νόμισμα με χαμηλό επιτόκιο προκειμένου να αγοραστεί ένα νόμισμα με υψηλό επιτόκιο, μπορεί να εξηγήσει με συνέπεια το παζλ του προθεσμιακού ασφαλίστρου, μόνο όταν η διαφορά των επιτοκίων είναι θετική, και άρα συνδέεται με στρατηγική μεταφοράς συναλλάγματος σε δολάρια Αμερικής.

How puzzling is the forward premium puzzle? A meta-analysis

A key theoretical prediction in financial economics is that under risk neutrality and rational expectations a currency's forward rates should form unbiased predictors of future spot rates. Yet scores of empirical studies report negative slope coefficients from regressions of spot rates on forward rates. We collect 3,643 estimates from 91 research articles and using recently developed techniques investigate the effect of publication and misspecification biases on the reported results. Correcting for these biases yields slope coefficients of 0.31 and 0.98 for developed and emerging currencies respectively, which implies that empirical evidence is in line with the theoretical prediction for emerging economies and less puzzling than commonly thought for developed economies. Our results also suggest that the coefficients are systematically influenced by the choice of data, numeraire currency, and estimation method.