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

Abstract

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.