Hedging a cash (spot) commodity or security with a futures contract where the underlying commodity is similar but not identical to the commodity or security being hedged. Cross-hedging is used when no futures contract is available on the commodity being hedged and a futures with a high degree of price correlation (positive or negative) can be substituted.
This hedging technique is used to reduce the risk associated with a situation known as asset mismatch and if same futures period (maturity) on a given asset is not available in the market, the situation is known as a maturity mismatch.
This hedge results in the so called cross hedging risk.
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