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.