What is a 'Cross Hedge'
A cross hedge is the act of hedging ones position by taking an offsetting position in another good with similar price movements. A cross hedge is performed when an investor who holds a long or short position in an asset takes an opposite (not necessarily equal) position in a separate security, in order to limit both up- and down-side exposure related to the initial holding.
BREAKING DOWN 'Cross Hedge'
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.