What Is a “Cross-Hedge” and When Is It Necessary?
A cross-hedge is a hedging strategy where the asset being hedged is different from the underlying asset of the futures contract used. It is necessary when a futures contract for the exact asset is unavailable, illiquid, or too costly to trade.
For example, hedging a small-cap altcoin with a Bitcoin futures contract. Cross-hedging introduces additional risk, as the prices of the two different assets may not move in perfect lockstep.
Glossar
Hedging Strategy
Framework ⎊ A hedging strategy, within the context of cryptocurrency derivatives and financial instruments, establishes a structured approach to mitigate risk exposure arising from price volatility.
Futures Contract
Leverage ⎊ Futures contracts in cryptocurrency represent agreements to buy or sell an underlying asset at a predetermined price on a future date, functioning as a derivative instrument that allows for amplified exposure without immediate asset ownership.
Correlation Coefficient
Association ⎊ The correlation coefficient, within cryptocurrency derivatives and options trading, quantifies the statistical relationship between two assets or variables, revealing the degree to which their price movements tend to coincide.
Basket of Futures
Composition ⎊ A standardized financial instrument representing a weighted collection of several underlying futures contracts, designed to track a specific market segment or index, often used for broad exposure or efficient hedging.
Bitcoin Futures
Derivation ⎊ Bitcoin Futures represent standardized forward contracts obligating the holder to buy or sell Bitcoin at a predetermined price on a specified future date, functioning as a derivative instrument whose value is derived from the underlying spot price of Bitcoin.