Overall the highest optimal hedge ratio and hedging

Overall this study is about the hedging effectiveness of the fourcommodities which are; gold, crude oil, crude palm oil, and tin. In order tofind the best commodity that has better hedging performance, the optimal hedgeratio needs to be estimated. But before proceeding to calculate the optimalhedge ratio, several general statistic tests on the time series data must bemeasured. The tests on time series data are; test for stationary, test fornormality, test for autocorrelation and test for heteroscedasticity. Eachcommodity was tested with those tests and for each commodity, the data of spotand future price of the commodity are used.When calculating optimal hedge ratio for each commodity, variousresults are obtained.

In this study, Diagonal VEC multivariate GARCH model isused to estimate the optimal hedge ratio. In simple words, optimal hedge ratiois the percentage of the portfolio that is hedged.  While hedging effectiveness is a process ofdetermining the effectiveness of the hedging process. From the tests that weredone in Eviews software and Microsoft Excel, it gives results that crude oilfuture against crude oil spot is the best commodity since it got the highestoptimal hedge ratio and hedging effectiveness.

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Then, diagonal VEC GARCH modelis being used again to estimate the average value of the time-varying hedgeratio series of crude oil future price against gold spot price, crude palm oilspot price and tin spot price. The hedge ratio value of crude oil against goldget the highest value while the hedge ratio of crude oil against crude palm oilget a negative value. This negative result indicates that crude oil futures arenot suitable to hedge the price of crude palm oil.From this study, it can be known that companies that are dependenton crude oil and gold can significantly reduce the risk by engaging the futurecontracts since their optimal hedge ratio is close to one. 


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