RISK MANAGEMENT,HEDGING,DERIVATIVE INSTRUMENT FUTURES,COAL,PLN

• Main Author: HAKIM NIM 13404011, ZIKRIL
• Format: Final Project
• Language: Indonesia
• Online Access: https://digilib.itb.ac.id/gdl/view/31907
• Institution: Institut Teknologi Bandung

Coal prices volatility causes change in electricity cost of production. It is because of price <br /> <br /> adjustments in long term contract by coal suppliers. The adjustments are unavoidable and <br /> <br /> happen unexpectedly. PLN does not have strong bargaining power to face adjustment since <br /> <br /> PLN does not have any shares in coal supplier. Besides, there is no Domestic Market <br /> <br /> Obligation policy by government that makes suppliers tend to do export better than to fulfill <br /> <br /> long term contract for domestic needs. <br /> <br /> Then, there should be a way to manage the risk to face coal price volatility. Risk <br /> <br /> management in this case is using hedging method with derivative instrument : futures. The <br /> <br /> aim of the method is to reduce change of transaction variance and to compensate loss of <br /> <br /> transaction caused by rising of transaction’s price. <br /> <br /> Before doing hedging, the first process is to make a clear restraint when coal suppliers could <br /> <br /> make a price adjustment. This thesis state some scenarios of restraint: adjustment permitted <br /> <br /> when spot price 50% higher than long term contract price; 75% higher than long term <br /> <br /> contract price; 100% higher than long term contract price; and contract based on spot price. <br /> <br /> After having a clear restraint when adjustment could happen, then hedging with ratio = 1 <br /> <br /> and minimum ratio is analyzed. <br /> <br /> Hedging by using minimum ratio (using Jonson Stein Model) could be used to minimize <br /> <br /> change of transaction variance as long as the ratio is between 0 – 1 and variance of change <br /> <br /> in transaction prices are not equal to zero . Generally, hedging could compensate loss when <br /> <br /> there is rise of futures price in exchange. Higher hedge ratio, better hedging compensates <br /> <br /> loss of transaction. <br /> <br /> By analyzing hedging as tool to minimize / reduce variance of transaction and to compensate <br /> <br /> loss of transaction, then it is designed, recommendation method to answer questions when <br /> <br /> hedging has to be done and how much futures contract has to be purchased (look at gambar <br /> <br /> 4.5). The design is made by prioritizing hedging method that compensate loss higher but still <br /> <br /> have variance less than or the same as non hedging change of transaction variance. <br /> <br /> Recommendation method is verified to January – August 2004 cases. The method is proven <br /> <br /> successfully to have 22% - 28% cost saving compared to without hedging methods. The <br /> <br /> recommendation method is proven also give more saving compared to another purchase <br /> <br /> methods : Hedging by only using hedge ratio minimum; hedging by only using hedge ratio, <br /> <br /> without hedging method. Variance of change of transaction by using recommendation method <br /> <br /> is proven less or the same as variance of change of transaction without hedging. If the costs <br /> <br /> saving values are still at the number, then recommendation method and scenarios 25%, 75% <br /> <br /> and 100% higher then contract could effectively saving 24 % - 66% cost of adjustment in <br /> <br /> PLN currently.