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A technique used in a variety of markets in an attempt to counter the risk of one instrument by taking a risk offsetting position in another instrument whose risk characteristics do not perfectly offset the position to be hedged. Examples include hedging the risk of a 100 stock portfolio with futures contracts on the S&P-500 or doing a currency hedge on a portfolio of German stocks with Swiss franc forwards or options. Among the risks in a cross hedge are that different maturities of the offsetting positions will lead to a mismatch, that the market for one of the instruments will be highly illiquid with correspondingly larger price fluctuations, or that differences in credit quality will affect the cross-hedge basis. See Maturity Mismatch Risk.
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