Cross hedging is a financial strategy using futures contracts to offset losses from one asset with profits from another. It is particularly useful when the specific asset is unavailable in the futures market, addresses mismatches in hedging horizon and risk size. However, it presents challenges that can complicate its implementation.

1. By:-
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Cross Hedge

2. 1. Meaning
2. Futures Market
3. Real World Scenario
4. When it is Recommended?
5. Problems in Cross Hedging
6. Reference
Content

3. Cross Hedge is a futures contract strategy or a financial strategy to offset or minimize the loss from one asset from the
profits of the other asset.
Meaning

4. The futures market is a platform where the buyers agree to buy something and the sellers agree to sell it at a
predetermined price and on a specified future date. This kind of contract, in which the price of the item is set on today’s
price but the delivery is to be made on a future date, is called a futures contract.
Futures Market

5. If the Fly High airlines expect the cost of jet fuel to rise in the future, they can purchase crude oil in the futures market.
If the price of jet fuels rises in three months’ time, the price of crude oil, will also rise (since both are positively
correlated). Now, fly high has purchased crude oil at today’s low price, and they will get it after three months when the
prices will be higher. They can sell that crude oil at that higher price in the future. This way, the risk of profits going
down because of the increase in jet fuel price, is taken care of.
Real World Scenario

6. • In case of risk of a rise or fall in the value of their asset
• When the exact asset is not available in the futures market
When it is Recommended?

7. • Mismatch in hedging horizon.
• Mismatch in size of the risk covered.
• Asset mismatch.
Problems in Cross Hedging

8. Reference
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