The Nature of Hedging Risk in Derivative Contract: Modeling an Enforceable Risk-Shifting Contract in Indonesia

Abstract

This writing is intended to convey the basic ideas of hedging in derivatives. The subject areas of concerns are central ones for the nature of hedging risk in derivative contract. Because the main object is to present an understanding of derivatives usages and risk management using derivative contract, this writing had modeled fundamental legal framework of enforceability of contract derivatives both in hedging and speculative transactions. In order to take full advantage of the opportunities they afford, we need to have a thorough understanding of how derivatives are valued. Without an understanding the economic factors that drive valuation, we wouldn’t know what effects do derivative have, therefore we cannot detect risk accurately. Since hedging risk is vitally important, it could be a matter of difference to a contract.

Keywords: hedging; speculative; derivative contract.