Forward, Forward Option and No Hedging Which One is the Best for Managing Currency Risk?

Bank Indonesia Regulation No.18/18/PBI/2016 concerning foreign exchange transactionsagainst rupiah between banks and domestic parties, indicates that the importance ofhedging for business actors in Indonesia. Based on the data of the rupiah exchange ratemovement against the dollar from January 2006 to December 2016 shows that the fluctuationof the rupiah against the US dollar tends to weaken, although at some point the observationshows the strengthening of the rupiah against the US dollar. The purpose of thisresearch is to assess impact of Forward, Forward Option and No Hedging Strategy formanaging currency exposure between IDR to USD. Using data from January 2006–December2016 taken from website of Bank Indonesia and Federal Reserve. Total 396 simulations,consists of 132 using Forward simulations, 132 using Forward Option simulations and 132using No Hedging simulations. Findings from this research show that Forward Optionwas has no positive contribution in managing currency exposure, No Hedging Strategyhas 36,36 percent positive contribution and forward contract has 72,73 percent positivecontribution in managing currency exposure. Its means Forward Contract was better thanForward Option and No Hedging Strategies in managing currency exposure