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Abstract

Corn and crude oil futures contracts are analyzed for their effectiveness in reducing uncertainty for international corn traders after China's accession to the World Trade Organization. A theoretical model is developed for a trader exposed to several types of risk. The naive hedge strategy is compared to the OLS hedge ratio estimation and the VECM-DCC-Multivariate-GARCH method. Explicit modeling of the time-varying in hedge ratios using all derivatives, and taking into account dependencies between different, yet related markets, resulting in reduction in risk during the 2008 financial crisis period. In general, hedging effectiveness is increasing in hedging horizon.

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