Cross Hedge

A cross hedge offsets exposure in one instrument using a different but related one, because a direct hedge is unavailable, expensive, or not permitted by the account type. A trader worried about a long EUR/USD position might take a short position in a correlated pair rather than simply closing or reversing the same ticket. The protection is only as good as the relationship between the two instruments. Correlations are estimated from history and can weaken or invert during exactly the stressed conditions a hedge is meant to cover, leaving basis risk — the residual gap between the hedge and the exposure. Cross hedging also doubles spread and swap costs, so it is a trade-off rather than free insurance.