What is Cross-Hedging?
Cross-hedging is an investment strategy that involves hedging some type of cash commodity by making use of a futures contract. The futures contract must be on some type of related commodity rather than another cash commodity. In addition, both the commodity and the futures contract markets involved must demonstrate a similar pattern with current price trends. In order to understand how cross-hedging works, it is first necessary to grasp the process of hedging in general. Essentially, hedging is a means of insulating the investor from the volatility of the market place by taking a position in two different markets. While the positions will be more or less equal, they will be the opposite of each other. Hedging is created when an investment is made in a different position related to a derivatives contract to counterbalance the overall risk. Losses in one market are offset by the gains in another market, thus minimizing the overall degree of risk to the investor. Cross-hedging builds on t
