Analysis of Hedging for Mitigating Exchange Rate Fluctuations in Indonesia, With A Logistic Regression Approach (Empirical Study of Consumer Cyclical Companies)

Abstract

The consumer cyclical companies are affected by exchange rate fluctuations and require hedging. Hedging is an action taken to reduce potential risk by mitigating exposure to price movements of an asset. This study determined how companies use hedging products and the factors that encourage companies to hedge. The companies used as research were 24 listed at IDX with a period of 17 years (2006 to 2022), and the analysis method used in this study was a logit regression. The most common derivatives firms use are cross-currency swaps, followed by call spreads. The decision to hedge is influenced by several factors: profitability, firm size, growth, liquidity, leverage, hedging regulation, and cash flow volatility. Examination of the regulation is the first research related to hedge decisions. Profitability, firm size, and cash flow volatility are variables with significant and positive results, while the negative but significant relationships with hedging decisions are leverage, liquidity, and hedging regulation. Furthermore, firms are expected to undertake or increase hedging activities if there are more positive internal supporting factors, and the government is expected to help create sustainable and comprehensive legal tools to create a more conducive climate to increase hedging activities.