Optimal Commodity and Cross-Currency Heding: The Case of Asean-5-Based Grain and Soft Commodity Traders

50 Pages Posted: 20 Jul 2011 Last revised: 13 Feb 2013

See all articles by Banyu Vidiapratama

Banyu Vidiapratama

Universitas Indonesia

Zaäfri A. Husodo

Universitas Indonesia, Graduate School of Management

Date Written: July 20, 2011

Abstract

The changes in commodity prices and exchange rates leave the representative ASEAN-5-based international commodity traders exposed with multiple risks. Foreign exchange hedging ratios are simultaneously estimated alongside commodity ratios in a time-varying portfolio framework. The comparisons of the minimum variance hedge ratios (MVHR) performance reveal that the model with the time-varying variance-covariance matrix provides greater risk reduction than the conventional model, illustrating importance of time-varying variance-covariance effect when modeling joint dynamic of spot and futures returns and hence estimating hedging strategies. When transaction costs are taken into account, incorporating Student’s t significantly enhances the performance of dynamic strategies in wheat and soybeans markets. However, the conventional OLS shows superior performance in the cotton market in terms of utility gain.

Keywords: ASEAN, Optimal Hedging, Commodity Hedging, Currency Hedging, Asset Pricing

JEL Classification: G12, G15

Suggested Citation

Vidiapratama, Banyu and Husodo, Zaäfri A., Optimal Commodity and Cross-Currency Heding: The Case of Asean-5-Based Grain and Soft Commodity Traders (July 20, 2011). Available at SSRN: https://ssrn.com/abstract=1890385 or http://dx.doi.org/10.2139/ssrn.1890385

Banyu Vidiapratama

Universitas Indonesia ( email )

Campus UI Depok
Depok, West Java 16424
Indonesia

Zaäfri A. Husodo (Contact Author)

Universitas Indonesia, Graduate School of Management ( email )

Depok, West Java 16424
Indonesia

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