# Overall the highest optimal hedge ratio and hedging

Overall this study is about the hedging effectiveness of the four

commodities which are; gold, crude oil, crude palm oil, and tin. In order to

find the best commodity that has better hedging performance, the optimal hedge

ratio needs to be estimated. But before proceeding to calculate the optimal

hedge ratio, several general statistic tests on the time series data must be

measured. The tests on time series data are; test for stationary, test for

normality, test for autocorrelation and test for heteroscedasticity. Each

commodity was tested with those tests and for each commodity, the data of spot

and future price of the commodity are used.

When calculating optimal hedge ratio for each commodity, various

results are obtained. In this study, Diagonal VEC multivariate GARCH model is

used to estimate the optimal hedge ratio. In simple words, optimal hedge ratio

is the percentage of the portfolio that is hedged. While hedging effectiveness is a process of

determining the effectiveness of the hedging process. From the tests that were

done in Eviews software and Microsoft Excel, it gives results that crude oil

future against crude oil spot is the best commodity since it got the highest

optimal hedge ratio and hedging effectiveness. Then, diagonal VEC GARCH model

is being used again to estimate the average value of the time-varying hedge

ratio series of crude oil future price against gold spot price, crude palm oil

spot price and tin spot price. The hedge ratio value of crude oil against gold

get the highest value while the hedge ratio of crude oil against crude palm oil

get a negative value. This negative result indicates that crude oil futures are

not suitable to hedge the price of crude palm oil.

From this study, it can be known that companies that are dependent

on crude oil and gold can significantly reduce the risk by engaging the future

contracts since their optimal hedge ratio is close to one.