REVIEW OF BLACK-SCHOLES MODEL AS ALTERNATIVE TOOL TO MEASURE THE FINANCIAL ASSET VALUE ON FINANCIAL COMPANY (REFER TO PSAK 55) AND COMPARISON BETWEEN COST OF HEDGING

Abstract

Refer to PSAK No. 55 concerning Financial Instruments: Recognition and Measurement, option value must be recorded based on its fair value obtained from its market price. However, in Indonesia there is no market price for options, hence valuation model can be used as the alternative. One model that has been widely used is the Black-Scholes model. In this study, we will test whether this model can be applied to comply with the regulation. In addition, options are also extensively used for hedging. In this study there will also a discussion of the cost of hedging if using options or borrowed fund. Analysis was carried out on two banking categories listed on the Indonesia Stock Exchange as the underlying asset of option, namely under development bank and first layer bank. The result shows that Black-Scholes model can be used to fulfill PSAK 55 and borrowed fund can be an alternative tool for hedging.