Cross Hedge

A A A

DEFINITION

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.

INVESTOPEDIA EXPLAINS

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.


RELATED TERMS
  1. Forward Contract

    A customized contract between two parties to buy or sell an asset at a specified ...
  2. Basis Risk

    The risk that offsetting investments in a hedging strategy will not experience ...
  3. Hedge

    Making an investment to reduce the risk of adverse price movements in an asset. ...
  4. Futures

    A financial contract obligating the buyer to purchase an asset (or the seller ...
  5. Pension Risk Transfer

    When a defined benefit pension provider offloads some or all of the plan’s ...
  6. Cash-And-Carry Trade

    A trading strategy in which an investor buys a long position in a security or ...
  7. Event Risk

    1. The risk due to unforeseen events partaken by or associated with a company. ...
  8. Money Market Hedge

    A practice that businesses engaging in foreign trade use to eliminate foreign ...
  9. Sharpe Ratio

    A ratio developed by Nobel laureate William F. Sharpe to measure risk-adjusted ...
  10. Stop-Loss Order

    An order placed with a broker to sell a security when it reaches a certain price. ...
Related Articles
  1. The Secret To Finding Profit In Pairs ...
    Options & Futures

    The Secret To Finding Profit In Pairs ...

  2. A Beginner's Guide To Hedging
    Options & Futures

    A Beginner's Guide To Hedging

  3. Hedge Funds: Higher Returns Or Just ...
    Options & Futures

    Hedge Funds: Higher Returns Or Just ...

  4. Hedge Funds Hunt For Upside, Regardless ...
    Options & Futures

    Hedge Funds Hunt For Upside, Regardless ...

  5. What are the main risks of after-hours ...
    Active Trading Fundamentals

    What are the main risks of after-hours ...

  6. What the best way to play backwardation ...
    Active Trading Fundamentals

    What the best way to play backwardation ...

  7. The Role Of Speculators In The Commodity ...
    Investing Basics

    The Role Of Speculators In The Commodity ...

  8. Trade Like A Hedge Fund Master
    Options & Futures

    Trade Like A Hedge Fund Master

  9. How Much Disaster Can Gold Hedge?
    Personal Finance

    How Much Disaster Can Gold Hedge?

  10. Does Higher Risk Really Lead To Higher ...
    Active Trading

    Does Higher Risk Really Lead To Higher ...

comments powered by Disqus
Hot Definitions
  1. Genuine Progress Indicator - GPI

    A metric used to measure the economic growth of a country. It is often considered as a replacement to the more well known gross domestic product (GDP) economic indicator. The GPI indicator takes everything the GDP uses into account, but also adds other figures that represent the cost of the negative effects related to economic activity (such as the cost of crime, cost of ozone depletion and cost of resource depletion, among others).
  2. Accelerated Share Repurchase - ASR

    A specific method by which corporations can repurchase outstanding shares of their stock. The accelerated share repurchase (ASR) is usually accomplished by the corporation purchasing shares of its stock from an investment bank. The investment bank borrows the shares from clients or share lenders and sells them to the company.
  3. Microeconomic Pricing Model

    A model of the way prices are set within a market for a given good. According to this model, prices are set based on the balance of supply and demand in the market. In general, profit incentives are said to resemble an "invisible hand" that guides competing participants to an equilibrium price. The demand curve in this model is determined by consumers attempting to maximize their utility, given their budget.
  4. Centralized Market

    A financial market structure that consists of having all orders routed to one central exchange with no other competing market. The quoted prices of the various securities listed on the exchange represent the only price that is available to investors seeking to buy or sell the specific asset.
  5. Balanced Investment Strategy

    A portfolio allocation and management method aimed at balancing risk and return. Such portfolios are generally divided equally between equities and fixed-income securities.
  6. Negative Carry

    A situation in which the cost of holding a security exceeds the yield earned. A negative carry situation is typically undesirable because it means the investor is losing money. An investor might, however, achieve a positive after-tax yield on a negative carry trade if the investment comes with tax advantages, as might be the case with a bond whose interest payments were nontaxable.
Trading Center