What Is a “Cross-Hedge” and How Does It Relate to Basis Risk?

A cross-hedge is a hedging strategy where a futures contract on a different but related underlying asset is used to hedge the price risk of the target asset. For example, hedging a specific altcoin with a Bitcoin futures contract.

Cross-hedging inherently introduces higher basis risk because the correlation between the two assets is imperfect, meaning their prices are likely to diverge more than a direct hedge.