cross hedge

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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.

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.
References in periodicals archive ?
Zivney, 1989, "Optimal Cross-Hedge Portfolios for Hedging Stock Index Options", Journal of Futures Markets, 9:67-75
Much of the following discussion will reveal just how effective this cross-hedge technique can be.
There is an answer that is consistent with both our theoretical rationales for successful financial innovation and with the facts: A good cross-hedge existed in the much more liquid silver futures market.
In other words, we can explain failure by establishing the existence of an efficient cross-hedge for the futures contract.
The upshot of this is that, as long as investors could safely ignore the possibility that the coins would be more valuable as currency, a silver futures contract was a good cross-hedge for the coins.
The usefulness of silver futures as a cross-hedge is confirmed in figures 3 and 4.
The other two lines are regression lines (lines of best fit) for the two different maturities.(18) Given our regression results, we can be more specific about the effectiveness of a cross-hedge. The coefficient of determination, or |R.sup.2~ statistic, from such a regression is a standard measure of the effectiveness of a hedge.
Having established the existence of a serviceable cross-hedge for the Canadian coinage futures contract, we now examine the contract from the perspective of the innovator.
Moreover, Medicare derivatives might cross-hedge other social insurance programs and private health insurance markets just like government securities cross-hedge the OTC interest rate markets.
Thus, existing financial instruments or other commodities that are highly correlated with the CPI provided a poor cross-hedge for health insurance costs.