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.
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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 illiquidity of some EM assets and currencies necessitates cross-hedging, with investors selling correlated, liquid assets to manage risk.
But due to the difference of quality between the Pakistan's imports and the WTI crude underlying the NYMEX contracts, the effectiveness of cross-hedging Pakistan's crude import prices using the WTI futures contract needs to be determined.
These two coefficients measure the basis risk in our cross-hedging effectiveness evaluation as the changes of the firm's total loss and the CHI value would not be perfectly correlated when a catastrophic event occurs--the former depends on both physical and nonphysical factors whereas the latter depends on physical factors of the hurricane only.
The first step with cross-hedging is to identify commodities whose price movements may be similar to the commodity of interest.
Some members of the converter/catalyst recycling industry now engage not only in physical collection and processing, with ISO certified product and environmental management, but also in extensive trading, including hedging and cross-hedging instrumentalities in the futures, options and physical markets.
Grant, "Cross-Hedging Foreign Currency Risk." Journal of International Money and Finance, March 1987, 85-105.
Cross-hedging foreign currency exposures is another area of inconsistency.
The two markets simply are not strongly correlated, typical of cross-hedging techniques.
In the futures markets, for example, hedging a commodity position with a futures contract on a close substitute (cross-hedging) may be adequate or even superior to hedging directly.(9) Identifying these possibilities and how they might be used can be quite subtle.
A second report provides equivalences (betas) comparing mortgage products to the standard product for cross-hedging.