PEER REVIEW "Islamic hedging for pilgrimage funds: case of Indonesia"

Purpose – The demand for Saudi Arabian real (SAR) is very high in the pilgrimage (hajj) season while the
authority, unfortunately, does not hedge the hajj funds. As such, the hajj funds are potentially exposed to
exchange rate risk, which can impact the value of hajj funds and generate extra cost to the pilgrims. The
purpose of this paper is to conduct simulations of Islamic hedging for pilgrimage funds to: mitigate and
minimize exchange rate risk, identify and recommend the ideal time, amount and tenors of Islamic hedging
for hajj funds, estimate cost saving by pursuing Islamic hedging and propose technical and general
recommendations for the authority.
Design/methodology/approach – Forward transaction mechanism is adopted to compute Islamic
forward between SAR and Rupiah (Indonesian currency) or IDR. Findings – based on simulations, the paper
finds that: the longer the Islamic hedging tenors, the better is the result of Islamic hedging, the decreasing of
IDR/USD is the right time to hedge the hajj funds and, on the other hand, the IDR/SAR appreciation is not the
right time to hedge the hajj funds.
Findings – Based on simulations, the paper finds that: the longer the Islamic hedging tenors, the better is
the result of Islamic hedging, the decreasing of IDR/USD is the right time to hedge the hajj funds and, on the
other hand, the IDR/SAR appreciation is not the right time to hedge the hajj funds.
Research limitations/implications – The research suggests the authority to (and not to) hedge the hajj
fund, depending on economic conditions and market indicators. Even though the assessment is for the
Indonesian case, other countries maintaining hajj funds might also learn from this paper.
Originality/value – To the best of author’s knowledge, this is the first paper in Indonesia that attempts to
simulate the optimal hedging of hajj funds.