Articles from The Jakarta Post, Jakarta | Business | Tue, April 14 2015, 4:26 PM
Business News : “Garuda eyes 17% cost efficiency via hedging”
National flag carrier Garuda Indonesia is aiming for cost efficiencies of 17 percent from its hedging partnership with four private lenders, namely Bank Internasional Indonesia (BII) Maybank, Bank Mega, ANZ Indonesia and Standard Chartered Bank Indonesia, as well as its previous hedging agreement with state lender Bank Negara Indonesia (BNI), a senior official has said.
“The cost efficiency could account for between 15 and 17 percent and this partnership is in order to anticipate currency uncertainties,” Garuda Indonesia president director Arif Wibowo said as quoted by Antara after the signing of the hedging partnership agreement in Jakarta on Tuesday.
He said the hedging partnership was conducted via a ‘cross currency swap’ mechanism worth Rp 1 trillion (US$77 million), comprising Rp 300 billion with Bank Mega, BII Rp 400 billion, ANZ Rp 150 billion and Standard Chartered Rp 150 billion.
“This is the second phase of the recovery of Garuda’s position in 2015 because the challenges it is facing are not only from exchange rate fluctuations but also in economic growth,” said Arif.
He added that the partnership was part of a quick-win strategy Garuda Indonesia was working on to boost its revenue, currently up by 12 percent.
“We will focus on our work to ensure that our revenue generation can run well as we want to conduct refinancing and cost restructuring. This will not happen unless our revenue generator can perform well,” said Arif.
Under the partnership, the rupiah exchange rate is set at around Rp 13,000 per US dollar and the oil price of 75 US cents per liter.
Under the agreement, Arif said, the four banks would pay out the obligations of Garuda Indonesia as the issuer of rupiah-denominated bonds to bondholders effective as of April 5 this year. Garuda would then pay all of its obligations to the four banks in US dollars on July 5, 2018.
Summaries of articles:
Overview Hedging
A risk management strategy used in limiting or offsetting probability of loss from fluctuations in the prices of commodities, currencies, or securities. In effect, hedging is a transfer of risk without buying insurance policies.
Hedging employs various techniques but, basically, involves taking equal and opposite positions in two different markets (such as cash and futures markets). Hedging is used also in protecting one’s capital against effects of inflation through investing in high-yield financial instruments (bonds, notes, shares), real estate, or precious metals.
Hedging is often considered an advanced investing strategy, but the principles of hedging are fairly simple. With the popularity – and accompanying criticism – of hedge funds, the practice of hedging is becoming more widespread. Despite this, it is still not widely understood.
Basically, every investment has some form of a hedge. Besides protecting an investor from various types of risk, it is believed that hedging makes the market run more efficiently.
A foreign exchange hedge (also called a FOREX hedge) is a method used by companies to eliminate or “hedge” their foreign exchange risk resulting from transactions in foreign currencies (see foreign exchange derivative). This is done using either the cash flow hedge or the fair value method. The accounting rules for this are addressed by both the International Financial Reporting Standards (IFRS) and by the US Generally Accepted Accounting Principles (US GAAP) as well as other national accounting standards.
A foreign exchange hedge transfers the foreign exchange risk from the trading or investing company to a business that carries the risk, such as a bank. There is cost to the company for setting up a hedge. By setting up a hedge, the company also forgoes any profit if the movement in the exchange rate would be favourable to it.
When a currency trader enters into a trade with the intent of protecting an existing or anticipated position from an unwanted move in the foreign currency exchange rates, they can be said to have entered into a forex hedge. By utilizing a forex hedge properly, a trader that is long a foreign currency pair, can protect themselves from downside risk; while the trader that is short a foreign currency pair, can protect against upside risk.
The primary methods of hedging currency trades for the retail forex trader is through:
- Spot contracts, and
- Foreign currency options.
Spot contracts are essentially the regular type of trade that is made by a retail forex trader. Because spot contracts have a very short-term delivery date (two days), they are not the most effective currency hedging vehicle. Regular spot contracts are usually the reason that a hedge is needed, rather than used as the hedge itself.
Foreign currency options, however are one of the most popular methods of currency hedging. As with options on other types of securities, the foreign currency option gives the purchaser the right, but not the obligation, to buy or sell the currency pair at a particular exchange rate at some time in the future. Regular options strategies can be employed, such as long straddles, long strangles and bull or bear spreads, to limit the loss potential of a given trade.
Summary
When companies conduct business across borders, they must deal in foreign currencies. Companies must exchange foreign currencies for home currencies when dealing with receivables, and vice versa for payables. This is done at the current exchange rate between the two countries. Foreign exchange risk is the risk that the exchange rate will change unfavorably before payment is made or received in the currency . For example, if a Indonesia company doing business in United States is compensated in dollar, that company has risk associated with fluctuations in the value of the Rupiah versus the United States dollar.
The article explained that the reason Garuda Indonesia doing hedging because to reduce cross currency swap. In they business, they need to purchase of aviation fuel for aircraft operational activities, and Garuda Indonesia using foreign currency for bought it. Currently, foreign currency can not predictable ups and downs that will give big impact against the cash flows of Garuda Indonesia.
Q & A
Questions:
1. What is the main topic from article above?
a. Garuda eyes 12% cost effectively via hedging
b. Garuda eyes 12% cost efficiency via hedging
c. Garuda eyes 17% cost efficiency via hedging
d. Garuda eyes 17% cost effectively via hedging
2. Based on the text we know that…
a. Garuda Indonesia is aiming for cost efficiencies of purchace avtur
b. Garuda Indonesia want to conduct refinancing and cost restructuring
c. Garuda Indonesia did hedging partnership with four private lenders
d. Garuda Indonesia sell the obligations to the citizen.
3. What does the word “he” in the sentence: “He said the hedging partnership….”. Refer to?
a. Arif Wibowo
b. Antara
c. Garuda Indonesia
d. Citizen
4. What does the word “recovery” has the same meaning with…?
a. Relapse
b. Restoration
c. Reformation
d. Resumption
5. We can find the value of the hedging partnership in the ………. paragraph.
a. First
b. Second
c. Third
d. Seventh
6. ……. two rings here on my little finger belonged to ………. grandmother. (Pronouns)
a. These / my
b. That / mine
c. Those / me
d. This / my
7. When the little boy grabbed the lizard, ………. tail broke off in ……….hand. (Pronouns)
a. it’s / his
b. it / him
c. its / his
d. its / he’s
8. Tokyo is the most crowded city……….the world. (Prepositions)
a. on
b. at
c. in
d. over
9. Don’t walk……….the street! Walk here ………. the sidewalk. (Prepositions)
a. in / on
b. on / at
c. at / on
d. in / to
10. It ………. that the victim……….with poison. (Passive)
a. was thought / had been killed
b. thought / had been killed
c. is thought / has killed
d. was thought / must have killed
Answers:
1. B
2. C
3. A
4. A
5. C
6. A
7. C
8. C
9. A
10. A
Source :
http://www.businessdictionary.com/definition/hedging.html#ixzz3XSq80iTx
http://www.investopedia.com/articles/optioninvestor/07/hedging-intro.asp
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