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What Is Cross Hedging? Meaning, Example, Benefits and Risks. - Bangalore
Tuesday, 6 October, 2026
Item details
City:
Bangalore, Karnataka
Offer type:
Offer
Item description
Cross hedging is a risk-management strategy where an investor or business uses a related but different financial instrument to reduce the risk of an asset or exposure that cannot be directly hedged.
In simple words, when a direct hedging instrument is not available you use another instrument whose price generally moves in a similar direction.
Why is Cross Hedging Used?
• Reduces price risk
• Useful when a direct futures or options contract is unavailable
• Provides flexibility in managing different types of market exposure
• Can protect businesses from unexpected price movements
Important Limitation:
Cross hedging is not a perfect hedge because the hedging instrument and the underlying asset may not move exactly together. This creates basis risk.
Example:
An airline wants to protect itself from rising jet fuel prices, but there is no suitable jet fuel futures contract available. So, it uses crude oil futures because crude oil and jet fuel prices usually move in a similar direction.
If jet fuel prices rise the airline may face higher costs, but gains from crude oil futures can help offset some of the increased cost.
In simple words, when a direct hedging instrument is not available you use another instrument whose price generally moves in a similar direction.
Why is Cross Hedging Used?
• Reduces price risk
• Useful when a direct futures or options contract is unavailable
• Provides flexibility in managing different types of market exposure
• Can protect businesses from unexpected price movements
Important Limitation:
Cross hedging is not a perfect hedge because the hedging instrument and the underlying asset may not move exactly together. This creates basis risk.
Example:
An airline wants to protect itself from rising jet fuel prices, but there is no suitable jet fuel futures contract available. So, it uses crude oil futures because crude oil and jet fuel prices usually move in a similar direction.
If jet fuel prices rise the airline may face higher costs, but gains from crude oil futures can help offset some of the increased cost.
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