EFFECTIVE CROSS HEDGING: EVIDENCE FROM PHYSICAL CRUDE PALM OIL AND ITS INTER-RELATED AGRICULTURAL FUTURES CONTRACTS

2018 ◽  
Vol 17 (2) ◽  
pp. 123
Author(s):  
Noryati Ahmad ◽  
Ahmad Danial Zainudin ◽  
Fahmi Abdul Rahim ◽  
Catherine S F Ho
Keyword(s):  
Palm Oil ◽  
Futures Contracts ◽  
Crude Palm Oil ◽  
Oil Futures ◽  
Futures Contract ◽  
Agricultural Futures ◽  
Cross Hedging ◽  
Optimal Hedge ◽  
Excessive Speculation ◽  
Chicago Board Of Trade

Since its establishment, Crude Palm Oil futures contract (FCPO) has been used to directly hedge its physical crude palm oil (CPO). However, due to the excessive speculation activities on crude palm oil futures market, it has been said to be no longer an effective hedging tool to mitigate the price risk of its underlying physical market. This triggers the need for market players to find possible alternatives to ensure that the hedging role can be executed effectively. Thus this investigation attempts to examine whether other inter-related grains and oil seed futures contracts could serve as effective cross-hedging mechanisms for the CPO. Weekly data of inter-related futures contracts from Chicago Board of Trade (CBOT) and Dalian Commodity Exchange (DCE) are employed to cross hedge the physical crude palm oil prices. The study starts from 2006 until 2016. Empirical results indicate that FCPO is still the best futures contract for hedging purposes while Chicago Soybean (CBOTBO) provides second best alternative if cross-hedging is considered. Keywords: Crude palm oil, Crude palm oil futures, Cross Hedging, Optimal Hedge Ratio, Effective Hedging

Effective cross hedging: Evidence from physical crude palm oil and its non-interrelated energy futures contracts

2019 ◽  
Vol 7 (2) ◽  
pp. 1
Author(s):  
Ahmad Danial Zainudin ◽  
Noryati Ahmad ◽  
Fahmi Abdul Rahim
Keyword(s):  
New York ◽  
Palm Oil ◽  
Variance Reduction ◽  
Least Square ◽  
Futures Contracts ◽  
Crude Palm Oil ◽  
Oil Futures ◽  
Energy Futures ◽  
Futures Contract ◽  
Cross Hedging

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.

scholarly journals Does Trading Volume explain the Information Flow of Crude Palm Oil Futures Returns?

2020 ◽  
Vol 12 (2) ◽  
pp. 115-136
Author(s):  
You-How Go ◽  
◽  
Wee-Yeap Lau ◽  
Keyword(s):  
Palm Oil ◽  
Trading Volume ◽  
Futures Market ◽  
Sensitive Information ◽  
Crude Palm Oil ◽  
Futures Trading ◽  
Oil Futures ◽  
Futures Contract ◽  
Information Set

This study examines the role of trading volume in the crude palm oil (CPO)futures market as a proxy for information áow from the perspective of the mixture-of-distributions hypothesis (MDH). Using the data from January 2000 to April 2017, a sym-metric GARCH model has been estimated, in which the residuals follow alternatively thenormal Student-t and generalised error distribution. An alternative augmented model thatconsists of trading volume as an exogenous variable is estimated with the same error dis-tributions. Our results suggest several conclusions: First, the trading volume could not actas a true proxy for information áow. This indicates that volume of futures trading containsrelatively less price-sensitive information. Secondly, the inclusion of trading volume into theconditional variance equation with Student-t distributed errors is important for modellingpurposes when the returns are leptokurtic and positively skewed. Hence, it can be concludedthat the use of return and trading volume will enhance the current information set usedby practitioners and analysts in pricing the CPO futures contract when there exists a highdegree of leptokurtosis in the returns. This is the Örst study that validates the MDH in thecontext of the CPO futures market

scholarly journals Open outcry versus electronic trading: Tests of market efficiency on crude palm oil futures

2018 ◽  
Vol 38 (6) ◽  
pp. 673-695 ◽  
Author(s):  
Stuart Snaith ◽  
Neil M. Kellard ◽  
Norzalina Ahmad
Keyword(s):  
Market Efficiency ◽  
Palm Oil ◽  
Electronic Trading ◽  
Crude Palm Oil ◽  
Oil Futures ◽  
Open Outcry

Crude Palm Oil Futures

2014 ◽  
pp. 381-390
Author(s):  
Jawwad Ahmed Farid
Keyword(s):  
Palm Oil ◽  
Crude Palm Oil ◽  
Oil Futures

scholarly journals Modelling Commodity Futures Prices: The Case of Crude Palm Oil Futures

2019 ◽  
Vol 24 (Supp.1) ◽  
pp. 61-78
Author(s):  
Khalil Ahmed ◽  
◽  
Zurina Shafii ◽  
Amir Shaharuddin ◽  
Nur Azira Mohd ◽  
...  
Keyword(s):  
Palm Oil ◽  
Commodity Futures ◽  
Futures Prices ◽  
Crude Palm Oil ◽  
Oil Futures

scholarly journals Heterogeneity of Cash Markets at Physical Delivery Points and the Hedging Effectiveness of Agricultural Commodity Futures in India – Lessons for Contract Optimization.

2020 ◽  
Vol 9 (SI) ◽  
pp. 79-89
Author(s):  
Sanjay Mansabdar ◽  
Hussain C Yaganti
Keyword(s):  
Contract Design ◽  
Commodity Futures ◽  
Futures Contracts ◽  
Agricultural Commodity ◽  
Futures Contract ◽  
Hedging Effectiveness ◽  
Several Variables ◽  
Agricultural Futures ◽  
Delivery Options ◽  
The Impact

Agricultural commodity futures in India are settled by physical delivery and the seller can choose the location of delivery from a list described in the contract specifications. Cash markets at these locations represent the deliverable basket for the futures contract and are the underlying assets for the delivery options granted to the seller by virtue of contract design.  These cash markets are generally heterogenous. This paper studies the impact of heterogeneity of the underlying cash markets in different locations on the hedging effectiveness of the associated futures contract. The hedging effectiveness of cottonseed oilcake and soybean futures is regressed against several variables that represent heterogeneity of the underlying cash markets using ridge regression. We find that in general, the greater the heterogeneity, the poorer the hedging effectiveness of the contract. This paper is unique in that it provides a framework for guidance for contract designers at exchanges and regulators who will find this research useful in optimizing delivery specifications for agricultural futures contracts.  This is especially important given the declining volumes in Indian agricultural commodity futures.

The impact of embedded location options on price discovery of agricultural futures contracts – the evidence from the Chana contract

2022 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Sanjay Mansabdar ◽  
Hussain C. Yaganti ◽  
Sankarshan Basu
Keyword(s):  
Price Discovery ◽  
Time Series Data ◽  
Futures Contracts ◽  
Series Data ◽  
Futures Prices ◽  
Content Type ◽  
Futures Contract ◽  
Agricultural Futures ◽  
Embedded Options ◽  
The Impact

Purpose Embedded options can create asymmetries in information impounded by cash and futures markets, causing errors in price discovery estimation. This paper aims to investigate the impact of embedded location options on measures of price discovery. Design/methodology/approach Various price discovery metrics are computed using observed futures prices that contain embedded location options and cash prices for Chana. Prices of a futures contract that contains no options using observed futures prices and estimates of location option value are synthesized. The price discovery measures are recomputed using synthetic option-adjusted futures contract prices and cash prices, and changes in these measures are attributed to the impact of the embedded location option. Findings If the presence of the location option is ignored, futures appear to dominate price discovery. Once the location option is adjusted for, cash markets are found to dominate price discovery. Research limitations/implications The lack of complete time-series data from the exchange for multiple commodities allows only limited empirical evidence for generalizing conclusions. Practical implications This paper highlights that regulators, exchanges and policymakers in India need to revisit delivery specifications of agricultural commodity futures contracts to enhance their utility from a price discovery perspective. Originality/value This work shows that ignoring the presence of embedded options can cause significant errors in price discovery assessment of agricultural futures contracts, particularly in heterogenous cash markets.

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