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Define “Cross-Hedging” and Explain Its Relation to Basis Risk.

Cross-hedging is the practice of hedging an exposure to one asset using a derivative contract on a different, but highly correlated, asset. For example, hedging a specific altcoin with a Bitcoin futures contract.

This technique inherently increases basis risk because the prices of the two different assets may not move perfectly together.

What Is a ‘Cross-Hedge’ and Why Does It Inherently Have Higher Basis Risk?
How Does the Correlation between Collateral and the Underlying Derivative Affect the Haircut?
What Is the Concept of a “Cross-Hedge” and How Does It Introduce Basis Risk?
What Is the Impact of a High Correlation Assumption on Cross-Margining Benefits?