Does Using Hedging Instruments Reduce Foreign Exchange Exposure?

This study aims to determine whether the use of derivatives in non-financial companies in Indonesia as a hedging instrument affects firms' exchange rate risk exposure. The study's sample is 164 non-financial companies listed on the Indonesia Stock Exchange in 2019. We used the multiple regression method to test the hypothesis using cross-sectional data. This study uses accounting data as exchange rate exposure called "changes in cash flow due to foreign exchange rates." The proxy of exchange rate exposure provides a contribution from this study in the form of novelty in measurement. We found that there is not sufficient evidence to conclude that the use of derivatives reduces the company's exposure to exchange rate risk. The result was confirmed by further testing and meta-analysis, which also found no difference in exposure between companies that use hedging instruments and those that do not. In other words, firms' exposure to changes in the exchange rate is symmetrical. Thus, we doubt the benefit of using a costly hedging instrument for Indonesian firms. However, this finding might differ during different periods, especially when the government does not intervene in the foreign exchange market