cross hedge

Cross Hedge

The act of hedging ones position by taking an offsetting position in another good with similar price movements.

Notes:

Although the two goods are not identical, they are correlated enough to create a hedged position as long as the prices move in the same direction. A good example is cross hedging a crude oil futures contract with a short position in natural gas. Even though these two products are not identical, their price movements are similar enough to use for hedging purposes.

See also: Basis Risk, Forward Contract, Future, Hedge

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cross hedge

In futures trading, an offsetting position in a futures contract for an existing position in a related commodity in the cash market. An example would be the sale of a contract on wheat for delivery in two months in order to offset an existing cash position in oats.