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Adjustments of the Non-Financial Sector to the Rise in Exchange Rate Volatility and Their Policy Implications in Indonesia

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  • Sahminan, Sahminan

Abstract

This paper presents evidence on exchange rate exposure of the returns of five non-financial sectors—agriculture, mining, consumer goods, basic industry, and manufacturing—in Jakarta Stock Exchange. The data covers the period from January 2000 to July 2006 with monthly frequency. Using different measures of industry-specific real exchange rates, the results of this paper show that none of the five sectors are significantly exposed to exchange rate fluctuations at 5 percent significance level. From an anecdotal survey of a sample of non-financial publicly traded firms, we find that the hedging strategy of the firms in facing exchange rate risk vary across firms. Some firms engage in hedging while others do not. Hedging instruments used by the hedged firms include forwards, swaps, and options. For non-hedged firms, the main reason for not hedging is that the cost of currency hedging is greater than its benefit.

Suggested Citation

  • 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.
    • Handle: RePEc:pra:mprapa:95471
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    File URL: https://mpra.ub.uni-muenchen.de/95471/1/MPRA_paper_95471.pdf
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    References listed on IDEAS

    as
    1. Sahminan, 2005. "Interest Rates And The Role Of Exchange Rate Regimes In Major Southeast Asian Countries," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 8(2), pages 1-40, September.
    2. Dominguez, Kathryn M.E. & Tesar, Linda L., 2006. "Exchange rate exposure," Journal of International Economics, Elsevier, vol. 68(1), pages 188-218, January.
    3. Bodnar, Gordon M. & Gentry, William M., 1993. "Exchange rate exposure and industry characteristics: evidence from Canada, Japan, and the USA," Journal of International Money and Finance, Elsevier, vol. 12(1), pages 29-45, February.
    4. Sahminan, Sahminan, 2007. "Effects of exchange rate depreciation on commercial bank failures in Indonesia," Journal of Financial Stability, Elsevier, vol. 3(2), pages 175-193, July.
    5. Sahminan, 2006. "Balance-Sheet Effects of Exchange Rate Depreciation: Evidence from Non-Financial Firms in Indonesia," Working Papers WP/6/2009, Bank Indonesia.
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    Cited by:

    1. 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.

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    More about this item

    Keywords

    Non-Financial Sector Exposure; Exchange Rate Risk; Hedging;
    All these keywords.

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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