Understanding derivatives (derivatives) in general is a financial instrument (financial instruments) whose value is derived or based on the value of the assets, instruments, or other commodities. This definition can be found at various sites on the internet or text books. In summary, it can be said that derivatives only if the assets, instruments, or other commodities as the main instrument available. Examples of the derivative is an option right.
As an illustration of examples can be presented as follows: there is a businessman who imports coffee right to buy options with a certain price to buy coffee from Brazil to exchange a predetermined, eg Rp9.500/USD, which will be paid 6 months later. This option can be executed or not depending on the situation faced by these entrepreneurs 6 months later. If the exchange rate at the time was 6 months later Rp8.500/USD, it will be more profitable for entrepreneurs to not execute its right option for the market exchange rate is cheaper. However, these businessmen have suffered losses due to spend money to buy the right option before 6 months. While if the opposite happens, ie 6 months later the exchange rate is 1 USD = Rp 10.500, the employer is able to execute the right option because they have cheaper options exchange.
In addition to understanding of derivatives, there is one term that is closely related to derivatives of "risk management". Risk management can be defined as the overall process for identifying, controlling, and minimizing the influence of the uncertainty of an event. The purpose of risk management is to reduce the risks faced by a company and to minimize financial losses (financial losses) which may arise due to a business transaction. If associated with the example above, then one might say that entrepreneurs are trying to minimize losses due to exchange rate fluctuations by buying the right option. The maximum loss that may be borne by the entrepreneur is the price of his right option in a situation that is stronger rupiah exchange rate.
Many companies, especially in the banking sector, which went bankrupt or experienced financial difficulties due to transactions using derivative instruments. The most famous case is probably the oldest merchant bank bankruptcy in England, Barings, in 1995. Barings Bank declared bankrupt after failing to cover equity losses of USD 1 billion from derivatives trading is done by one employee, Nick Leeson. Another case is the financial crisis experienced by the National Australian Bank (NAB) in January 2004 which was also caused by the derivatives transactions that are not wise. According to an independent report from PriceWaterhouseCoopers (PwC) on the case, the loss suffered by NAB from derivatives transactions between September 2003 until January 2004 reached USD 360 million.
Based on the foregoing, several questions arise that might disturb the players on the money market on derivatives trading:
1. Does derivatives trading beneficial or detrimental to the company?
2. Still bermanfaatkah companies use derivatives as part of risk management?
Both these fundamental questions need to look for the answer because the starting height of derivatives trading, the players in the derivatives markets should be more careful and me.
Solutions
Financial experts split into two in terms of derivatives trading. Some say that derivatives trading is useful and beneficial shareholders, but some are still questioning the benefits of derivatives trading.
Walmsley (1998) believes that there are at least four uses of derivatives are: transfer of risk (risk transfer), improving the liquidity (the liquidity improvement), the creation of credit (credit creation), and the creation of equity (equity creation). By using derivatives investor or entrepreneur is able to shift the financial risk because they have to protect themselves from uncertainty (for hedging the risk). Because derivatives can easily be traded in financial markets, the derivative instrument is believed to be liquid (easily melted) as investors or entrepreneurs can cash out derivatives in financial markets with relatively quickly when they need the money. Derivatives can also be created as credit and equity derivative instruments to expand sources of credit and equity by creating a type of credit and new equity. Walmsley argued that the benefits of credit and equity creation was caused by investors and entrepreneurs have more financial instruments to choose from.
Walmsley admits that although there are also weaknesses of derivatives, such as might cause instability, but Walmsley concluded: "On balance, however, the innovations that have been made are almost certainly beneficial for the system as a whole" which roughly translated is that in general existing derivatives as an innovative financial instruments can definitely be beneficial for the system (finance) as a whole.
Karimova (2002) also agree with Walmsley about the benefits of derivatives. According to the main purpose of derivatives is to protect the company in a business transaction. Goals expressed by Karimova is known as the enclosure (hedging). His research reveals that firms that use hedging in their business transactions will have a market value higher than companies that do not use or stop using hedging.
On the other hand, Stout (1996) still doubt the benefits of derivatives trading. According to speculative derivatives trading can be very damaging for investors and shareholders because it can erode corporate profits quickly. Stout explained that: "disagreement-based trading in derivatives, like gambling, is a negative-sum game that erodes the wealth and increases the risks of the average player who indulges in it" a free translation is that the disagreements over trade in derivatives, such as of gambling, is a negative-sum game (ie a game where no one has won) which would erode the company's assets and increase financial risks for the players involved.
Stout also argues that the speculative trading of derivatives is more dangerous than gambling because the players put a huge amount of money for where the money is at stake is not owned by the players but belongs to a third party such as pension funds, deposit holders, and shareholders. In the economic situation like this, the principals in the derivatives market are faced with the high level of uncertainty that could bring destruction on their careers and companies. Accordingly, Stout remains doubtful whether the derivatives market is growing rapidly is the insurance market or gambling.
Evaluation Solutions
Based on the arguments between the pro and cons of trading derivatives, can be concluded that currently there are at least two main objectives of the protection of derivatives trading (hedging) and speculative.
The author believes that the first derivatives arise in order to protect the company from uncertainty or economic fluctuations due to do a business transaction. In other words, the main purpose of derivatives in the first place is for hedging. This means companies can reduce the risk of a business transaction with a fix certain things (benchmark) as the exchange rate so that if one day there are sharp fluctuations in the benchmark (eg exchange rate) Financial condition of the company will remain stable for the previous set. Therefore the company can focus its resources to other activities that are more useful than just concentrating on watching the fluctuations in benchmarks.
Economic crisis in the world, especially in Indonesia, in 1997 provides valuable lessons for the economic actors of the hedging policy. At the time the rupiah exchange rate against USD free fall of approximately 1 USD = Rp2.500 to 1 USD = Rp 11.000 - Rp15.000, many companies in Indonesia, which has foreign debt in the form of CAD experience a financial crisis because of the value of its debt soared to 6-fold so that the amount of interest paid to swell. Meanwhile, companies that make hedging on its foreign debt exchange congratulations because they do not have to pay interest on the debt with the market rate at the time but enough to pay interest in accordance with an agreed exchange rate at the time of hedging transactions prior to the crisis.
On the other hand can be seen that when this is not a bit player in the money market derivatives trading in order to seek profit enormous in a short period of time (speculation). Companies that make speculation in derivatives trading profits could be enormous in a short time, as was the case at Barings Bank prior to bankruptcy. However, companies may also experience massive losses in a short time due to speculate in the derivatives market. In other words, money that came from derivatives trading is "easy come, easy go" as well as in gambling.
In addition, companies often do not disclose this to shareholders for the company at large Profit from speculative derivatives trading shareholders usually do not ask or do not care where it comes from such a big advantage. The new shareholders are aware of the speculative trading of derivatives is risky if the company took a loss due to trade these derivatives.
From the discussion above, it can be concluded that the trading of derivatives for the purpose of protection (hedging) should be applied by companies as a risk management strategy in the economic situation of uncertainty that can be protected from financial losses due to economic fluctuations that occur. Although there are fees to be paid by the company to do hedging, but the certainty generated by the hedging will enable companies to operate more effectively.
In contrast, speculative trading of derivatives in the economic situation of uncertainty is not a wise step for the company because of the risks faced considerable. Management companies should also realize that the money used to speculate in the derivatives market is not their money but the money belonged to shareholders.
In a stable economic situation, hedging strategies can still be applied by the company as a precaution in case of monetary instability outside estimates of economists and money market participants. If the company feels that the economic situation is safe enough for speculative trading of derivatives in the policy should be done very carefully and still have to take into account the risk that the worst case of loss will not affect the company's financial stability. For that, the amount of money that will "play" in the derivatives market with the purpose of speculation should be kept to a minimum.
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