Noryati Ahmad^a, Ahmad Danial Zainudin^b,c, Fahmi Abdul Rahim^c, and Catherine S F Ho^c
aArshad Ayub Graduate Business School, Universiti Teknologi MARA, Malaysia
^bMaybank Investment Bank Malaysia
^cFaculty of Business & Management,Universiti Teknologi MARA, Malaysia

ABSTRACT

Since its establishment, the 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 interrelated futures contracts from the Chicago Board of Trade (CBOT) and the Dalian Commodity Exchange (DCE) were employed to cross hedge the physical crude palm oil prices. The study started from 2006 and ended in 2016. Empirical results indicate that FCPO is still the best futures contract for hedging purposes while the Chicago Soybean (CBOTBO) is the second best alternative if cross-hedging is considered.

Keywords: Crude palm oil, Crude palm oil futures, Cross Hedging, Optimal Hedge Ratio, Effective Hedging