The Muamalat Newsletter Vol.1 2023

FEM Newsletter | June 2023 12 ForeignCurrencyDerivativeHedging Practice inMalaysia: HowFar Have WeCome? Author: Dr. Wan Nurhanan Wan Suhaimi Faculty of Economics & Muamalat Universiti Sains Islam Malaysia Knowing Foreign Currency Derivative Hedging It is widely accepted that virtually no business could ever avoid being affected by the currency movements – despite strictly concentrating its operation on the domestic market. Rapid movements of both information and currency affect almost all market segments. Hence, it is crucial for firms to actively monitor the currency movements as it affects the stock prices and their ability to generate profit. The recent series of OPR increments have further rung the bell to scrutinise the currency as the changes directly affect the interest rates. Thus, it is wise to say that business not only should be paying more attention to their currency exposure, but also eye for any hedging strategy that could lessen and protect their exposure level. Such risk management strategy is called foreign currency hedging, encompassing both the financial and operational hedging practices. The easiest explanation of hedging is drawing a parallel with insurance that essentially insures against negative unexpected events. While operational hedging involves diversification of operation, financial hedging often involves utilisation of derivatives. True to its name, foreign currency derivative hedging protects the assets and firms from unexpected currency movements by alleviating its potential loss. Another confusion that befalls hedging is the misunderstanding that hedging