What is a cross-hedge?

Well it is a type of hedge, as the name implies, but one whereby the hedge is taken through the purchase of a future in a different type of asset, though that different asset is of course related.

A cross-hedge is usually one that is held against an interest rate, usually where a large movement one way or the other would be a risk to a particular investment that has been made.

The way that it works in theory is simply to assume that there is some sort of relation between movements in the main market and the related market, and is often used if there is no futures market available in the asset owned.

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