BI: Call-spread option potentially to manage $4.6 billion
JAKARTA (TheInsiderStories) – Indonesia central bank, Bank Indonesia (BI), will soon launch new hedging transactions to be named “call-spread option” in late August to spur the market activity. The central bank expects the new instrument has the potential to grab the liquidity in the financial market around US$4.6 billion.
The hedging contracts derived from displacement call spread option by nine companies in Indonesia which carry out call-spread option transaction in Singapore and London.
The executive director for Market Deepening Development of BI Nana Hendarsah said, the policy will provide an opportunity for large banks – banks in the category BOOK 4 and 3 — to improve their hedging transaction service.
Based on BI regulation PBI 16/21/2014 on demand side improvement, companies that have foreign exchange (forex) debts shall be hedged in domestic banks beginning from 2017. Therefore, domestic banks must be ready to accommodate and should have more competitive products in order to ease burden of companies with foreign debt exposure.
This rule allows commercial banks under BOOK 3 and 4 category that have good risk management so that they can minimize risks.
BI has also sought to maintain good risk management by prohibiting speculative transactions and shall have underlying assets.
According to him, the 25 banks in the country have the ability to conduct derivative transactions worth $58 billion per year. Currently, the group of large banks still control derivative transactions in the forward and swap foreign exchange market.
Nana added, that the central bank would encourage banks to apply for permission before providing these hedging products to the Financial Services Authority (OJK) after the call-spread option rule is published.
Normally hedging cost in Indonesia is set between 6 and 7 percent, but today many companies costs for hedging out and call-spread is set around 2 to 3 percent. (*)
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Source: The Insiderstories
BI: Call-spread option potentially to manage .6 billion