Bank Indonesia

Interest Rate and Currency Hedging:
Principles and Applications

Prof. Ian Giddy, New York University

Principles and Applications of Hedging
Hedging is the use of forwards, futures, swaps, options and other derivatives to protect corporations and financial institutions against losses from fluctuations in market prices -- such as currencies, interest rates, and commodities. Hedging techniques, on the other hand, are often abused and thier performance is not monitored. This seminar addresses these problems. A hedge should always seek to minimize risk without depending on the directon of market prices. In the current financial crisis, since many companies and banks are discovering that risk exposures, once ignored, are destroying their value, it is essential to identify the way to properly manage and monitor the hedging process.

About the Seminar
This one-day program provides new insight into the reasons for hedging market risks, and the techniques of hedging. Professor Giddy explains
how  risk managers sometimes attempt to construct hedges on the basis of their outlook for interest rates, exchange rates or some other market factor. However, the best hedging decisions are made when risk managers acknowledge that market movements are unpredictable. The seminar covers the reasons for hedging, as well as pros and cons of forward contracts, options and other forms of hedging.

Pre-Seminar Reading

Course Outline



What are the Objectives of Hedging?  
  • What risks are hedgable? Business risk versus market price risk
  • Hedging in the current market crisis
  • Should companies and banks hedge?
  • Hedging based on the theory that market movements are unpredictable
  • Advantages and disadvantages of "selective hedging"
  • How much to hedge? 0%-50%-100%
  • Value creation through risk reduction
  • Case study: Indosat foreign currency debt hedging
Types of Hedging  
  • Transactions hedging
  • Cash flow hedging
  • Hedging accounting or FDI exposure
  • Fair value hedging
  • Measuring and hedging economic exposure
Techniques of Hedging  
  • A brief comparison of hedging tools
  • Forwards, futures, swaps,asset-liability matching
  • Uses and abuses of options
  • Pricing and linkages among the tools
  • When to use, and when not to use
  • A Hedging Matrix
Hedging and Risk Control  
  • How to manage risk associated with its hedging transactions
  • Mark to market? when and when not?
  • Distinguish hedging from speculation
  • Identify goal of hedging
  • How to measure hedging performance
  • Compare active hedging with forward prices
  • Management reporting: hedging and risk control
  • Conclusion: separate risk management from risk measurement

Case Studiess
Indosat Currency Hedging


About the Instructor
Dr. Ian Giddy, born in South Africa, has taught finance at NYU, Columbia, Wharton, Chicago and in over 45 countries worldwide for the past three decades. He was Director of International Fixed Income Research at Drexel Burnham Lambert from 1986 to 1989. The author of more than fifty articles on international finance, he has served at the International Monetary Fund and the U.S. Treasury and has been a consultant with numerous corporations and financial institutions in North and South America, Europe, Asia, the Middle East and Africa. As a banker and consultant he has been involved in the growth of the structured finance market in the USA, Europe and Asia. He is the author or co-author of The International Money Market, The Handbook of International Finance, Cases in International Finance, Global Financial Markets, Asset Securitization in Asia and The Hudson River Watertrail Guide. He and his wife are the founders of Cloudbridge, a nature reserve in Costa Rica. | | | | | contact
Copyright 2009 Ian Giddy. All rights reserved.