Cross Hedge


DEFINITION of 'Cross Hedge'

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.


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.

  1. Hedge

    Making an investment to reduce the risk of adverse price movements ...
  2. Forward Contract

    A customized contract between two parties to buy or sell an asset ...
  3. Futures

    A financial contract obligating the buyer to purchase an asset ...
  4. Basis Risk

    The risk that offsetting investments in a hedging strategy will ...
  5. Swap

    A derivative contract through which two parties exchange financial ...
  6. Convergence

    The movement of the price of a futures contract towards the spot ...
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