Effective cross hedging: evidence from physical crude palm oil and its non-interrelated energy futures contracts / Ahmad Danial Zainudin, Noryati Ahmad and Fahmi Abdul Rahim

Zainudin, Ahmad Danial and Ahmad, Noryati and Abdul Rahim, Fahmi (2019) Effective cross hedging: evidence from physical crude palm oil and its non-interrelated energy futures contracts / Ahmad Danial Zainudin, Noryati Ahmad and Fahmi Abdul Rahim. Journal of Emerging Economies & Islamic Research, 7 (2). pp. 1-17. ISSN 2289-2559

Abstract

Recent researchers found that Crude Palm Oil Futures contract (FCPO) in Bursa Malaysia Derivatives is no longer an effective hedging tool to mitigate the price risk in cash market due to the excessive speculation trading activities. This is very alarming to the hedgers hence possible hedge pair alternatives to crude palm oil physical must be identified to ensure that the hedging can be executed effectively. Therefore in this study, Ordinary Least Square, bivariate VAR and bivariate VECM were used to examine whether the non-interrelated energy futures contracts could serve as effective cross-hedging mechanisms for the CPO. Weekly data of agricultural and energy futures contracts from Intercontinental Exchange (ICE), New York Mercantile Exchange (NYMEX), and Tokyo Commodity Exchange (TOCOM) are employed to cross hedge the physical crude palm oil prices. The study starts from 2006 until 2016. Empirical results indicate that bivariate VECM gives more hedging variance reduction. Surprisingly, overall FCPO is still the best futures contract for hedging purposes while Japanese crude oil futures (TOCOM) represents the energy futures market as the best cross hedge alternatives for CPO.

Metadata

Item Type: Article
Creators:
CreatorsID Num. / Email
Zainudin, Ahmad DanialUNSPECIFIED
Ahmad, NoryatiUNSPECIFIED
Abdul Rahim, FahmiUNSPECIFIED
Subjects: S Agriculture > SB Plant culture > Sugar crops. Sugar plants > Palms
T Technology > TP Chemical technology > Oils, fats, and waxes
Divisions: Universiti Teknologi MARA, Selangor > Puncak Alam Campus > Faculty of Business and Management
Journal or Publication Title: Journal of Emerging Economies & Islamic Research
Journal: UiTM Journal > Journal of Emerging Economies and Islamic Research
ISSN: 2289-2559
Volume: 7
Number: 2
Page Range: pp. 1-17
Item ID: 29331
Uncontrolled Keywords: Crude Palm Oil, FCPO, Cross Hedging, Energy Futures
URI: http://ir.uitm.edu.my/id/eprint/29331

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