Hedging in Chinese Commodity Futures Markets

Chinese commodity futures markets have become some of the most important derivative markets worldwide. This paper studies the optimal hedge ratios on two popular contracts in China, soybeans and copper, by employing copula functions. Our empirical results suggest that the proposed copula hedging strategy outperforms the simple regression method and dynamic conditional correlation (DCC) method by most appropriately capturing the joint dependence between spot and futures returns. Additionally, the optimal hedging horizon for soybeans is four and five months to maturity given the unique Chinese time-dependent margin rule, not the nearby month as with many other futures contracts.