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CHAPTER II .................................................................. 18
LITERATURE REVIEW ............................................. 18
2.1 Theoretical Basis ..................................................................................... 18
2.1.1 Understanding Risk Management ........................................................ 18
2.1.1.1 Foreign Exchange Exposure ............................................................. 18
2.1.1.2 Transaction Exposure........................................................................ 19
2.1.1.3 Operational Exposure / Economical ................................................. 20
2.1.1.4 Accounting Exposure ........................................................................ 21
2.1.1.5 Understanding Hedging .................................................................... 22
2.1.2 Derivative Instruments for Hedging .................................................... 23
2.1.2.1 Future Contract ................................................................................. 24
2.1.2.2 Forward Contract .............................................................................. 25
2.1.2.3 Swap .................................................................................................. 26
2.1.3 Benefits of Hedging ............................................................................. 26
2.1.4 Disadvantage of Hedging ..................................................................... 28
2.1.5 Debt to Equity Ratio ............................................................................ 28
2.1.6 Financial Distress ................................................................................. 30
2.1.7 Growth Opportunity ............................................................................. 31
2.1.8 Liquidity ............................................................................................... 33
1
2.1.9 Firm Size .............................................................................................. 34
2.2 Theoretical Framework and Hypothesis Formulation ............................ 35
2.2.1 Effect of Debt to Equity Ratio on Hedging Activities ......................... 35
2.2.2 Effect of Financial Distress on Hedging .............................................. 36
2.2.3 Effect Corporate Growth Opportunities on Hedging Activities .......... 36
2.2.4 Effect of Liquidity on Hedging Activities ........................................... 37
2.2.5 Effect of Firm Size on Hedging Activities........................................... 38
2.3 Research Model ...................................................................................... 38
REFERENCES ............................................................... 51
2
CHAPTER I
INTRODUCTION
1. 1 Background
Free trade faced by increasing competition and market price fluctuations that
small, medium, and large businesses are competing to keep their business in
M.H (in Djojosoedarso, 1999) risk is a variation of the results that can occur
Kertonegoro, 1996) his book Fundamentals of Risk and Insurance, the term risk
3. Risk is uncertainty.
3
5. Risk is the probability that a result is different than expected (the probability
of any outcome different from the one expected). (Kertonegoro, 1996, p.1)
The risk has two characteristics, the first is the uncertainty of the
occurrence of an event, and the second is the uncertainty that if it happens will
cause harm (Djojosoedarso, 1999). From the above quotes, I can conclude that
something uncertain, and may even make the estimate disappear or lose. Other
examples of this type of risk are the sharp and rapid depreciation of the rupiah
(the monetary crisis), a series of land, sea and air transportation accidents,
due to foreign exchange exposure. In the financial statements stated that there are
losses due to foreign exchange rates that affect the amount of profits that should
be greater if not affected by the exchange rate of foreign currency. The impact of
foreign exchange losses can be felt widely, from the decline in corporate profits,
the decline in earnings per share, and followed by a decline in stock prices in the
stock market, if the decline in stock prices occurs, may affect the number of
The company will lose the funding channel. These risks cannot be directly
prevented from occurring, will certainly directly affect the condition of the
company, but the company can still handle the risks in various ways and
4
management (Djojosoedarso, 1999). The management includes the following
measures:
1. Seeks to identify the elements of uncertainty and the types of risks facing the
business.
2. Strive to avoid and cope with all the elements of uncertainty, for example by
4. Seek to seek and take steps (methods) to deal with identified risks (managing
legal causes (such as natural disasters or fires, deaths, and lawsuits) Financial risk
management, on the other hand, focuses on risks that can be managed using
financial instruments (Wikipedia ) There are several ways that can be done (the
Preventing and reducing the possibility of incidents that result in losses, for
the company's operations as a result of the loss provided funds to cope (other
5
Controlling risks, hedging (futures trading) to tackle the risks of scarcity and
certain amount of insurance premiums that have been set, so that insurance
to risk and affects company performance if the predicted risk actually occurs. The
The principle of hedging is to cover the loss of the initial asset position with the
advantage of the position of the hedging instrument. Before hedging, hedger only
holds a number of initial assets. After hedging, hedger holds a number of initial
assets and hedging instruments are called hedging portfolios (Sunaryo, 2009).
6
For example, before hedging, hedger has 100 risk. After hedging, the risk
of hedging portfolio is 20. Hedging can reduce risk by 80. It is said that hedging
risk coupled with a decrease in profits. The implication is if the asset position
the hedging cost, consequently the gain from the initial asset position closes the
are contractual agreements between two parties to sell and purchase a certain
derivatives are not limited to financial assets, such as stocks, warrants, and bonds,
but may be present in commodities, precious metals, stock indices, interest rates,
and exchange rate (Utomo 2000). Derivative products also include types of risk
7
In table above is a graph of fluctuations in the value of Bank Indonesia
interest rate period 2006-2010 with observation per 3 months. The central bank
interest rate or BI Rate is the policy interest rate that reflects the stance or stance
of monetary policy stipulated by the Indonesian bank and announced to the public
8
When viewed from the declining rate of interest rates continue to decline, and
suddenly increased sharply although not reaching the highest point in the graph,
from the lowest point makes some companies complicated by these conditions
associated with interest-rate loans related to the interest rate Reference from Bank
Indonesia.
This figure above is the fluctuation chart of the rupiah against the Dollar
for the period. In the figure graph is the price of the Rupiah against one US
Dollar. The exchange rate is the price of a currency against another currency or
the value of a currency against the value of another currency (Salvatore, 1997).
Exchange rate fluctuations also affect inflation and output, and become an
value or the Dollar currency appreciates, the price of imported goods becomes
more expensive which will directly raise the price level and inflation (Mishkin,
9
2008). Type of risk of exchange rate fluctuations included in foreign exchange
From the period of April 2015 to July 2015 did not experience significant
of September 2015, the Rupiah currency depreciated against the Dollar or Dollar
appreciation of the Rupiah currency, with the previous value in July 2015 valued
the maturity period, the company will pay more money for transactions than it
should be. But not so if the company uses one of the derivative instruments as a
hedging activity to cover the losses that would arise from the risk of depreciation
Dollar per barrel period July 2015-Dec 2016. Fuel or Oil World is one of the most
needed commodities in life, the industry desperately needs the role of fuel,
fluctuations in fuel prices can affect the overall economic condition because of the
importance of that role, especially in terms of price stability, if fuel price levels
10
fluctuate, Can lead to price uncertainty, resulting in complications of decision-
In the period of July 2015 world oil price of $ 48.94 and continues to
fluctuate until the highest point in May 2016 period of $ 50,9 such a continuous
fluctuation can make the economy unstable due to the company will raise the
price of goods because the cost of production is more expensive due to rising fuel
prices . Risks associated with rising world fuel prices can be minimized by the use
studies have been conducted to determine the internal factors of firms that
Nguyen and Faff (2003) states that companies prefer to use derivatives if the
value is large and have more debt in the capital structure. While in research
conducted by Guniarti (2011) also think so, that is financial distress relate
negatively to hedging.
Then research conducted by Nance, Smith, and Smithson (1993) states that
11
research conducted by Ameer (2010) that growth opportunities companies have a
Subsequent to a study by Clark and Judge (2005) states that another factor
by Spano (2005) states that the liquidity variable has a negative result on hedging
size companies tend to prefer using derivative instruments for hedging activities.
While research conducted by Triki (2005) states that the company will do hedging
Doing hedging activity and there is still a research gap hence more
research is needed about it. Based on the background description, the title taken in
overshadow the company. The derivative products derived in Table and graph in
section 1.1 indicate the fluctuations in the risks faced by the company, thereby
12
increasing the uncertainty in the company against risks. Therefore, systematic and
strategic risk management is required to deal with the fluctuation of these risks,
decision
toward hedging
decision
(1993) effect
Against hedging
decisions
has a negative
effect
Against hedging
decisions
13
effect
Against hedging
decisions
Positive response
to hedging
decisions
2. Ameer Growth
(2010) Opportunity is
influential
negative response
to hedging
decisions
Against hedging
decisions
Against hedging
decisions
14
5. Firm Size toward 1. Nguyen dan Company size is
Positively to
hedging decisions
influential
Negatively to
hedging decisions
by using hedging decisions. Then there is still a research gap from previous
research, based on the above, it can be formulated problem in this research are:
1. How does the debt rquity ratio (DER) affect Hedging decisions?
15
2. To analyze the effect of financial distress on the use of derivative instruments
as Hedging decisions
4. To analyze the effect of the company's liquidity level on the use of derivative
Hedging decisions
1. For the Company: The results of this study are expected to be a reference for
2. For Investors: The results of this study are expected to be a reference in the
because it can know which companies are indeed responsive in protecting its
investment.
3. For Academics: the results of this study are expected to be a good reference
16
1. Chapter I Introduction
This chapter covers the theoretical foundations of research, the results of previous
17
CHAPTER II
LITERATURE REVIEW
Risk is a loss due to an unwanted event arises. Risks are identified based
on the underlying cause, ie risk due to market price movements (eg, stock prices,
exchange rates or interest rates) are categorized as market risk. Risk due to default
counterpay partners (default) is called credit risk (default). Meanwhile, the risk of
has three stages: identifying, measuring, and managing risk. Financial institutions
or investors can manage risk by: reducing risk, for example by hedging, providing
instruments. Banks may transfer credit risk to other parties using credit derivatives
18
foreign currencies (Yuliati, 2002).
Judging from the impacts and effects, there are three kinds of foreign exchange
exposures:
transaction as there is a difference between the foreign exchange rate at the time
the transaction is agreed upon and when the transaction is settled / fulfilled. So
this exposure is related to transactions of existing transactions, but not yet due
(Yuliati, 2002).
rate, upon receipt of the converted to the desired currency. Likewise with outflow
cash paid in foreign currency denominations, its value will depend on the foreign
exchange rate when payment will be made. Transaction exposures may occur due
to the use of credit transactions or borrowed funds that are repayable in foreign
stages:
19
after the consolidation. This is necessary to avoid the company from reddancing
forward markets, futures markets, money markets, options, and swap agreements.
the foreign exchange rate. Operational exposure analysis aims to determine the
with transaction exposures, which are related to changes in cash flows due to
wider range of transaction exposures and their impact on the company's more
2002).
Changes in exchange rates can affect all operations of the company, such
determine the competitiveness and value of the company. Here what counts is the
foreign exchange rates that have been allegedly included in corporate planning
(Levi, 2001).
20
The key to success in managing the operational exposure well is the
and its readiness in preparing the appropriate strategic steps to react to the
condition. The best step management can take is to diversify the company's base
funds in more than one capital market and in more than one type of currency.
Accounting exposure does not result in changes to the company's real cash
statements from all its subsidiaries scattered in various countries (Yuliati, 2002).
strategies and resource allocation to each subsidiary. The way in which to manage
exposure by balancing the wealth and liabilities of the company, in the opposite
direction. In addition to the hedge balance sheet, there is also another technique of
contractual hedge but the results obtained often involve speculative elements.
21
2.1.1.5 Understanding Hedging
Where hedging is one of the economic functions of futures trading, namely the
transfer of risk. Hedging is a strategy to reduce the risk of loss caused by price
fluctuation.
loss of the initial asset position with the advantage of the hedging instrument
position. Before doing hedger only hold a number of initial assets. After hedging,
the hedger holds a number of initial assets and a certain number of hedging
called a hedging portfolio. This hedging portfolio has a lower risk than the initial
asset.
hedge is defined as follows: "A hedge is one or more traders perfomed in order to
market opposite to positions held in the physical market in the same number of
"hedger". Hedger has a main business in the physical market (cash market), while
22
fluctuations. By doing these activities the targeted benefit can be realized, or if
deviated, the deviation is not too far away. Therefore the process of hedging
swaps, with derivative instruments derived from stocks, interest rates, bonds,
2009) Option (Option) Is a derivative contract with option (right) to sell or buy
something as stated in the contract. Many of the options are traded on the options
exchange, but often the option is just a personal agreement between the company
Option is said to be a derivative effect which means it will only have value
whilst connected to the financial asset in question each type of option has a certain
market life, so that if its market life is up, the derivative effect is of no value. The
meaning of financial assets here are like ordinary shares, bonds, and convertible
1. The Option Option (Put Option) is a negotiating instrument that allows the
time.
23
An example of an option contract is as follows:
crude oil prices which is one of their key raw materials. To protect itself against
rising prices, the company bought a 6-month buy option to buy 1,000 barrels of
crude oil at an exercise price of $ 40. This option costs $ 1 per barrel.
If the price of crude oil is above the $ 40 exercise price, when the option is
due, the company will use the option and accept the difference between the oil
price and the exercise price. If the price of oil falls below the exercise price, the
option will be exhausted and of no value. If the price of oil falls from the exercise
price, for example $ 30, the holder of the buy option does not have to use the buy
option, because it is above the market price, if the option holder executes the
The essence of the option is that a person who has entered into an option contract
may use the right or not to exercise the option right to execute an agreement.
predetermined price. Suppose there is a wheat farmer, there is a concern that the
price of wheat may fall to the lowest point, then the farmer to contract futures
against wheat. With the contract the farmer agrees to send a certain amount of
24
provide a certain amount of grain at a predetermined price to the contract buyer
(Marcus, 2006).
Wheat farmers will be lucky if, the market price is due under the futures
contract price, because the buyer of the contract must pay more than the market
price, but the wheat farmer will lose if the market price matures above the futures
contract price. The difference between futures and options is if the option contract
holder has the choice of whether he will make the delivery or not, whereas the
from its Japanese suppliers. The bill of ¥ 53 million must be paid on July 27. The
company may arrange with its current bank to buy forward this yen amount for
July 27 delivery at a forward price of ¥ 110 per dollar. Therefore, on July 27,
Computer Parts paid the bank ¥ 52 million / (¥ 110 / $) = $ 481,818 and received
481,818 for ¥ 53 million, the cost of the dollar is locked. Note that if the company
has not used forward contracts to protect itself and the dollar depreciates during
this period, the company will have to pay a larger dollar amount. For example, if
the dollar depreciates to ¥ 100 / dollar, the company must exchange $ 530,000
25
2.1.2.3 Swap
stream. Swap interest rates, the company will pay or swap swap fixed payments
for other payments that are tied to the interest rate. So if the interest rate rises,
increases the interest expense of the company on its floating interest, the cash
flow from the swap deal will also rise, closing its exposure (Marcus, 2006).
periodically for a certain period in the future according to agreed rules. For
periodic cash flow based on a fixed interest rate of 5.5 percent of 100 (USD) to B,
floating rate and pays a fixed interest rate. Instead, B receives a fixed interest rate
and pays a floating interest rate. The reference number 100 (USD) is called
notional swap. In interest rate swaps for A and B are the same, ie 100, therefore,
notional does not need to be exchanged at the end of the swap period. (Sunaryo,
follows:
26
B. For producers or commodity owners, hedging is a marketing tool (a
marketing tool). By hedging, farmers can determine the selling price of their
products, before, during, and after harvest through the futures market. They
so it can set the cost of production and finally can definitely set the selling
D. With the hedging of the creditor (bank) more dare to give credit to the
Because by doing so, the owner of the commodity has minimized the risk of
material, so the targeted profit is more certain and this is a bank guarantee
that the money given can be returned and the interest can be paid. Usually
that are not dihedge, while for those who do hedging get credit 90 percent of
working capital.
Through hedging, the final consumer will be charged a lower and stable selling
price this is because both producers and processeors are able to minimize costs
capital.
27
2.1.4 Disadvantages of Hedging
In addition to the benefits gained, hedging also has some losses that must
A. Base risk Price developments in the physical market are sometimes not
correlated fairly (unidirectional) with the futures market, so the risks are not
B. Cost
By hedging there is a cost burden for the hedger, among others, freight
costs, bank interest costs, gedgung costs, insurance costs, margin payments
and transaction costs. Therefore, hedger must consider these costs before
hedging.
This happens because the quality and number of dihedged products is not
always the same as the quality and number of standard contracts traded.
obligations indicated by some part of its own capital or equity used to repay debt.
Debt to Equity Ratio (DER) is the ratio between total debt owned by the company
with total equity. Mathematically Debt to Equity Ratio (DER) can be formulated
𝑇𝑜𝑡𝑎𝑙 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
DER= 𝑇𝑜𝑡𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦
28
Total debt is the total liabilities (both short-term and long-term debt),
while the total shareholder's equity is the company's own total capital. This ratio
shows the composition or capital structure of the total loan (debt) to total capital
owned by the company. The higher Debt to Equity Ratio (DER) shows the
composition of total debt (short-term and long-term) is greater than the total
capital itself, resulting in greater impact on the outside company (creditor) (Ang,
1997).
The high debt ratio makes the company has many funding alternatives in
funding all kinds of corporate activities, both from operational needs and
expansion needs that make the company bigger. The availability of these funds
facilitates cash flow that supports all sorts of activities to respond to market
demand and increase profitability. However, this raises new problems of rising
bankruptcy costs, agency costs, higher interest rate returns, and the creation of
($), when the condition of the rupiah exchange rate against the Dollar depreciates,
therefore the company must pay more because the depreciation of the rupiah And
the risk of default is greater, can increase the big expenses due to the use of debt
conditions make the uncertainty greater, therefore companies need to perform risk
29
management to divert the risks that may arise. This is in accordance with the
opinion of the higher level of debt or Debt Equity Ratio it will be the greater
hedging decision making done to reduce the adverse impact of risks Nguyen and
bankruptcy and bankruptcy trends of the company, now known as the Altman Z-
Score. Altman started out with 22 ratios that seem to intuitively make sense as
(Sudiyatno, 2010).
Z = X1 + X2 + X3 + X4 + X5
Where,
Z = Overall Index
𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝐶𝑎𝑝𝑖𝑡𝑎𝑙
X1 = 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
30
𝑅𝑒𝑡𝑎𝑖𝑛𝑒𝑑 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠
X2 = 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
𝐸𝐴𝑇
X3 =𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒
X5 = 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
Companies that have low Z-Score value indicate the company is not
healthy, or the trend of bankruptcy is high, it makes the company will be more
careful in managing its finances, making it more possible to find a risk transfer
So when the Altman Z-Score value decreases the firm will be prompted to
make a hedging decision so it can be seen that the relationship between Altman Z-
forward, so to answer that opportunity, the need for large amounts of funds to
finance that growth in the future will be much needed. Therefore the company
will retain the revenue earned for reinvestment and at the same time the company
1989). This will be different if the company has a low growth opportunity rate so
31
Growth Opportunity variable measurement proxy in this research is
comparison between MVE (market value of equity) and BVE (book value of
𝑀𝑉𝐸
Growth Opportunity = 𝐵𝑉𝐸
Or
𝐸𝐴𝑇
MVE = 𝐸𝑃𝑆 x Closing Price
The market value or the Market Value of Equity obtained from the
calculation element of its net profit to decline in value when the company is
has increased so that the cost of production more large, thus lowering the rate of
profit. While the calculation of book value of equity is expected to have a smaller
value because it indicates that the use of debt on the company is relatively small
and can increase the value of book value of equity, as revealed by Aretz (2009).
among other companies, it makes the company confident to use external funds for
invest funds to companies that have a high growth opportunity of the company,
32
The value of the company's proxy growth opportunities that the larger the
company makes more use debt as a source of funds (Chen, 2006). Companies that
are experiencing rapid growth tend to choose debt as a source of funding rather
than companies that have a slow rate of growth, as revealed by Weston and
Brigham (1984). Increased debt in the company, of course, will increase the risk
firms with high growth opportunity growth opportunities tend to use hedging
2.1.8 Liquidity
Liquidity is the company's ability to fulfill the obligations that must be met
to meet its obligations at the time of billing, a company capable of fulfilling its
(Munawir, 1981).
The liquidity ratio that measures the company's short-term liquidity ability
is proxied by the current ratio. Current assets generally include cash, securities,
one year, tax accruals and other accrued expenses (mainly salary).
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
Current Ratio = 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
The high CR value of a company will reduce uncertainty for investors, but
indicates idle cash will reduce the profitability of the company, resulting in
33
smaller ROA (Priharyanto, 2009). If the level of profitability decreases indicates
the company is not able to use the funds at maximum to get profit or profit.
The size of a company makes the decision different. The size of the
company can affect the ease of a company in obtaining sources of funding both
external and internal (Short and Keasy, 1999). The bigger a company is, the
greater the risk, and the more hedging activities to protect their assets. Because
the impact of a risk in larger companies has more impact, they will impose a
The size of the company is seen from the total assets owned, the greater
the assets owned, the more carefully the company stepped up an activity in the
company. Larger firms certainly have more extensive operational activities and
are more at risk because the possibility of transacting to different countries will
exposure due to fluctuations in foreign exchange rates. For that larger company
will do more hedging decision making in order to protect the company from risk
(Nance, Smith & Smithson; 1993, Judge; 2002,2003, Nguyen and Faff; 2002,
34
2.2 Theoretical Framework and Hypothesis Formulation
improve the company's performance. The availability of funds is able to run the
company for various needs, such as operational needs, business expansion, and
others. Due to the fulfillment of these funds, then the company can gain greater
benefits. However, the higher the proportion of the debt to own capital, it will
The use of larger debt compared to the quantity of the capital poses a new
problem of rising bankruptcy costs, agency costs, higher interest rate returns, and
Franco Modigliani and Milton Miller (MM Theory). With this increasing risk,
escape the company from the existence of these risks that can make the company
instruments for hedging activities (Clark, Judge, Ngai; 2006 and Batram, Brown,
and Fehle; 2006). The higher the debt-to-equity ratio of the company, the greater
the hedging that needs to be done to reduce the adverse effects of the ratio, the
greater the level of debt to equity ratio the firm receives, the greater the chances
for the company to make decisions Hedging Nguyen and Faff (2003), Spano
35
2.2.2 The Effect of Financial Distress on Hedging
bankruptcy trends. If the value of the calculation shows a low number, then the
makes the company will be more careful in managing its finances, making it more
So when the Altman Z-Score value decreases the company will be driven
Score value with hedging activity is negatively related. This is in accordance with
Companies with high growth opportunities indicate that the company has a
order for the company to grow. One way to get the source of funds quickly to
finance the growth of companies is to enter the source of debt into the capital
structure of the company. Companies that have rapid growth tend to use debt as a
larger source of funding than companies with slow growth (Baskin, 1989, Weston
Debt is one of the effective ways to get a quick cash injection, but it will
bring new impacts, namely the additional risk of using the debt, such as
36
fluctuations in a commodity, foreign exchange, and interest rates. The greater the
parties and the higher the risk of financial difficulties the hedging actions carried
out will also be more and more. In accordance with the results of research
conducted by Nance, Smith, and Smithson (1993) states that firms with high
projected by the current ratio. Current ratio is one of liquidity ratio that aims to
The high CR value of a company will reduce uncertainty for investors, but
indicates idle cash will reduce the profitability of the company, resulting in
the company is not able to use the funds at maximum to get profit or profit. The
transaction exposure affects the short-term cash flow of the firm, if the transaction
payments are made using the foreign exchange rate denomination, the value will
be greater if the foreign currency appreciates against the domestic currency, so the
risk increases. Thus the higher the value of liquidity, the lower the hedging
37
activity performed because the risk of financial difficulties that appear tend to be
Similarly, Rapid Growth will create risks that disrupt the company's
activities. Firm size is so, the greater a company, then the company's activities not
only involve domestic trade, but also using foreign business ties. Business
relationships with companies located abroad are usually associated with trade
countries will result in foreign exchange exposure and the risk of currency
The bigger a firm the greater the risks arise, the more likely the company
to do hedging. Larger firms will do more hedging activities than smaller size firms
(Nance, Smith, and Smithson, 1993; Judge, 2002, 2003, 2006; Nguyen and Faff,
DER (+)
Financial
Distress (-)
Growth Hedging
Opportunity
Liquidity (+)
38
Firm Size (+)
CHAPTER III
RESEARCH METHODOLOGY
This study analyses the factors that influence the decision making of
hedging activities within a company. This study uses risk management theory
variables are DER, Financial Distress, Growth Opportunity, Liquidity, and firm
size.
hedging is one of the economic functions of futures trading, namely the transfer of
risk. Hedging is a strategy to reduce the risk of loss caused by price fluctuation.
forward contracts, and swaps. In this study, looking at the consolidated annual
39
financial statements of automotive and allied products listed on the Indonesian
Stock Exchange for the period 2015-2016, if the company uses derivative
Debt to Equity Ratio (DER) reflects the ability of a company to fulfil its
obligations as indicated by some part of its own capital or equity used to repay
debt. Debt to Equity Ratio (DER) is the ratio between total debt owned by the
company with total equity. Mathematically Debt to Equity Ratio (DER) can be
40
Where:
among other companies, it makes the company confident to use external funds for
invest funds to companies that have a high growth opportunity of the company,
because Assessed can be a good investment vehicle. The value of the growing pro
fit of growth opportunities makes the company use more debt as a source of funds
follows:
41
Where:
Liquidity is the company's ability to fulfil the obligations that must be met
fulfil its obligations at the time of billing, a company capable of fulfilling its
The size of a company makes the decision is different. The size of the
company can affect the ease of a company in obtaining sources of funding both
external and internal (Short and Keasy, 1999). The bigger a company the risk is,
the greater the risk, the more hedging activities to protect their assets.
42
instruments for hedging Do not Hedging = 0
facilities
2 Debt to Equity Ratio The ratio between Total Total Liabilities / Total
Equity
Measurement
value of equity)
liabilities is proxied
6 Firm Size The overall ratio of total Firm Size = In Total Asset
assets
or more things and form the underlying problem in a particular research (Santoso
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with type of Automotive and Allied Products listed in Indonesia Stock Exchange
The type of company that will be the population of research is on the type
to other products quickly. This makes the company much use of risk transfer
hedging activities is greater than the type of company other than automotive
2. Companies that are in the automotive and allied product type of population
are more often transacting with foreign parties, such as raw material
3. Type of company automotive and allied product has the largest percentage
the criteria, there are 8 companies doing hedging activity, that is equal to
fulfil some criteria with purposive sampling method. The purposive sampling
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1. A manufacturing company with Automotive and Allied Products type listed
International
Tbk
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15 PT. United Tractors Tbk Hedging
The data used in this study is secondary data containing independent and
during 2015 - 2016. Financial statement data obtained from the office of Capital
Semarang.
annual financial statements and their notes from IDX for 2015 - 2016. For the
purposes of the analysis, pooled data (pooled data) for 2 years from the sample
The collected data will be analyzed with descriptive statistics first before
Logistic regression is done when the researcher wants to test whether the
46
independent variable (Ghozali, 2007). Logistic regression analysis technique does
independent variable. Logistic regression does not have the normality assumption
of the independent variables used in the model, meaning the explanatory variables
do not have to have normal distributions, linear, or have the same variant in each
meaning that the dependent variable does not require homoscedastic for each
independent variable.
(1995) states that the first logistic regression relies on the accuracy of the
all group matrices, where this situation is difficult to find. Secondly, even if this
assumption is found, many researchers prefer logit analysis because logit analysis
Kuncoro (2001) also said that logistic regression has several advantages over
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no classical assumption test is required even if the independent variable is
variables.
intervals.
Or
Where:
E = Natural logarithm
B0 = Regression constant
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Analysis of logistic regression model testing (Ghozali, 2006; Kuncoro, 2001;
Gujarati, 2003):
Logistic regression is a regression model that has been modified so that its
different.
fit the model. If the Hosmer and Lemeshow's goodness of fit test is equal to
or less than 0.05 then the null hypothesis is rejected. Whereas if the value is
greater than 0.05 then the zero hypothesis cannot be rejected means the
To assess the whole model is indicated by log likehood value (value -2 log
= 0) where the model only insert constants with -2 log L after entering free
variable mode (block number = 1). If value -2 log L block number = 0>
value -2 log L block number = 1 then show good regression model. Log
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the regression model so that the decrease in log likehood shows better
regression model.
The regression coefficient test is performed to test how far all the
dependent variable. Test results obtained from SPSS program in the form of
table variables in the equation. From the table obtained value coefficient
wald statistic and probability value (sig) by way of wald statistic value
compared with chi square table whereas probability value (sig) is compared
a) Ho can not be rejected if wald statistic <chi square table and probability
value (sig)> level significance (α). This means that Ha is rejected or the
variable is rejected.
4. The regression coefficient can be seen from the value of B in the table view
of variables in the equation. The sign derived from the B value expresses the
50
REFERENCES
Chen, Long. 2006. On the Relation between the Market-to-Book Ratio, Growth.
Clark Ephraim and Amrit Judge. 2005. “Motives for Corporate Hedging:Evidence
Clark Ephraim, Amrit Judge, & Wing Sang. 2006. “The Determinants of
Hair, Jr, Joseph F, Ralph E. Anderson, Ronald L. Tatman, and William C. Black.
1995. Multivariate Data Analysis with Reading 5th ed. New York:
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Klimczak, Karol Marek. 2008. Corporate Hedging and Risk Management Theory.
Klimczak, Karol Marek. 2008. Corporate Hedging and Risk Management Theory.
Short, Helen dan Kevin Keasy. 1999. “Managerial Ownership and the
Finance Vol 5
www.bi.go.id
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