cross hedge

Cross Hedge

An investment strategy that involves taking a position on a commodity followed by an equal but opposite futures position on a different commodity with similar price movements. Because the price movements of the two commodities should be closely correlated, a negative movement on the present commodity should be offset by a positive movement on the opposite futures position, and vice versa. Cross hedging is often used in markets where there is no viable futures market for the presently-owned commodity. See also: Commercial trader.
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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.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.
References in periodicals archive ?
The paper evaluates the ex-ante cross hedge strategies over the 1990-2013 period using 1-4 months futures NYMEX in order to see how to reduce price risk?
We simulate ex-ante cross hedges for 1990-2013 and find that in all cases except one, ex-ante hedging was effective in reducing price risk.
En la estrategia completa la razon de cross hedge es siempre uno, es decir, se considera que la fecha de vencimiento de los contratos tendra una correlacion perfecta y positiva entre los precios al contado y futuros.
Donde: [e.sub.ch] es la efectividad de cross hedging, var (U) es la varianza de la cartera no protegida; var [H.sup.*]) es la varianza minima de la cartera protegida por la estrategia de cross hedgingcompleto; y ch es la razon de cross hedge, que en el caso de la estrategia completa es igual a uno.
Figure 9-2 shows a grain sorghum cross hedge with corn using the concept of dollar equivalency.
Figure 9.2 Cross hedge of cash streams Cash Futures Plants grain Sells two corn futures (5,000 Sorghum crop estimates 8,000 cwt bushels each) for $2.20/bu Production Current price $4/cwt $22,200 value Estimated revenue $32,000 Sells at harvest for Buys @ $2.00 $3.80/cwt and earns $30,400 $20,000 value Revenue cash stream loss of Revenue cash stream gain of $1,600 $2,000 Because futures contracts are standardized, it is difficult to use hedging ratios for small cash positions.
Cow-calf producers will almost always have to place a cross hedge. A cross hedge is a hedge whereby the cash and futures specifications do not match exactly.