Cross Hedging

Cross hedging refers to hedging a trader’s position by taking an offsetting position in another product with similar price movements. Though the two products are not identical, they are correlated to create a hedged position as long as the prices move in the same direction. For cross-hedging to work, it is essential to have a logical connection between the two separate investment opportunities. For example, cross hedging a crude oil futures contract with a short position in natural gas. Though these two products are not identical, their price movements are similar.

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