Hedging with commodity futures: evidence from the coffee market in Vietnam

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In July 2018, the Vietnam Commodity Exchange (VNX) was transferred into the Mercantile Exchange of Vietnam (MXV) to hedge price risks through futures on international commodity exchanges. This research aimed to verify the efficiency of futures on ICE EU and ICE US under the perspective of hedging for Vietnamese coffee, determine optimal hedging ratios and the optimal number of each futures contract, and investigate the feasibility of introducing domestic commodity exchanges in Vietnam. Using the Vector Error Correction Model (VECM), the results show that (1) Robusta futures with expiration dates of January, March, May, and July on ICE EU are efficient hedging tools, but the adverse result is justified for Arabica futures on ICE US; (2) Robusta futures with the expiration date of January are the best in terms of risk management for Vietnamese coffee market; (3) optimal hedge ratio of Robusta futures of around 34% is much lower than ratios showed by previous researches; (4) in the short term, introducing coffee futures into the domestic commodity exchanges is still not feasible in the short term, but should be considered in the long term in Vietnam. This is the first study providing empirical evidence about the hedging role of futures contracts on ICE EU and ICE US, contributing to enrich the existing empirical evidence on the hedging role of futures for the agricultural sector.

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    • Figure 1. Implementation procedure of data analysis
    • Figure 2. Movements of coffee spot prices in Vietnam and coffee futures prices on ICE EU and ICE US
    • Figure 3. ETC coefficient of Robusta futures contracts
    • Figure 4. Experts’ evaluations on the feasibility of introducing coffee futures into the domestic commodity exchange
    • Figure 5. Coffee production in Vietnam in 2019 (tons)
    • Table 1. Methods used to examine the role of hedging on prices of commodity futures
    • Table 2. Information about Robusta futures contracts on ICE EU
    • Table 3. Information about Arabica futures contracts on ICE US
    • Table 4. Statistics of data on futures prices and spot prices of Robusta coffee
    • Table 5. Statistics of data on futures prices and spot prices of Arabica coffee
    • Table 6. Estimated VECM and cointegrating equation (long-run model) between Robusta spot prices and futures prices on ICE EU
    • Table 7. Comparison of optimal hedging ratios in various researches
    • Conceptualization
      Nguyễn Thị Nhung, Nguyen Nhu Ngan, Tran Thi Hong, Nguyen Dinh Cuong
    • Data curation
      Nguyễn Thị Nhung, Nguyen Nhu Ngan, Tran Thi Hong, Nguyen Dinh Cuong
    • Formal Analysis
      Nguyễn Thị Nhung, Nguyen Nhu Ngan, Tran Thi Hong, Nguyen Dinh Cuong
    • Investigation
      Nguyễn Thị Nhung, Nguyen Nhu Ngan, Nguyen Dinh Cuong
    • Methodology
      Nguyễn Thị Nhung, Nguyen Nhu Ngan, Tran Thi Hong, Nguyen Dinh Cuong
    • Software
      Nguyễn Thị Nhung, Nguyen Nhu Ngan
    • Supervision
      Nguyễn Thị Nhung
    • Validation
      Nguyễn Thị Nhung
    • Visualization
      Nguyễn Thị Nhung, Nguyen Nhu Ngan, Tran Thi Hong, Nguyen Dinh Cuong
    • Writing – original draft
      Nguyễn Thị Nhung, Nguyen Nhu Ngan, Tran Thi Hong, Nguyen Dinh Cuong
    • Writing – review & editing
      Nguyễn Thị Nhung