What Is cross commodity trading? Is it effective? Know more about it!!
A brief overview of cross commodity trading
We know a lot about that commodities are volatile assets but do you have any idea about cross commodity trading or cross commodity hedging? If not, then you will be requested to have a quick look at the following sections in order to know more about this topic. Alternately, if you are already aware of cross commodity trading, then also you are requested to check this article for in-depth details on this particular topic.
Needless to mention, cross commodity hedging is quite popular among speculators and producers. It’s even considered to be an excellent financial strategy that’s used to manage and mitigate risk. This methodology is widely known for securing and protecting wealth from a sudden turndown asset value.
Know more about cross commodity hedging
It’s true that the concept of cross commodity hedging is extremely complicated. To give you a simple overview, it’s nothing but an efficient and effective risk management strategy which can be used in trading. Here, the traders need to take the opposing position among two or more positively correlated markets. Plus, while taking the opposing positions, the traders must ensure that there are an equal quantity and maturation date for the assets. By making a clever and consistent correlation, the traders can ensure limited systemic exposure. As a result, they can protect the assets from a sudden and unfortunate turndown value. Sounds quite interesting, isn’t it? But, please keep in mind that it’s not that easy to find an effective cross commodity hedging or trading strategy.
In fact, it’s both tricky and challenging to find an appropriate cross commodity hedging-based risk management strategy by creating a good amount of correlation between assets. Now, creating a perfect and consistent correlation between assets is a complex process due to multiple factors, such as frequent changes in asset values, nuance in creating a valid risk assessment and measurement, and much more too. Nevertheless, if the traders can successfully develop a strong and consistent cross trading strategy, then it can be a great way to reduce risk exposure for sure.
Applications of cross commodity hedging
In the above sections, you have revealed a basic overview of cross commodity hedging. Let’s now quickly talk about the possible applications of this particular risk management strategy.
Cross Commodity Trading Example
i) Air travels: The application of cross commodity trading is quite evident among commercial airline service providers. These commercial airlines are always active in developing and implementing cross hedge strategies to manage the volatility and uncertainty of jet fuel pricing. That’s why they oftentimes take opposing positions in correlated markets like heating oil and WTI crude oil.
ii) Sunflower oil: Sunflower oil producers also use cross hedge strategies to manage and mitigate risks. In most of the cases, they attempt to create a positive correlation between sunflower oil and soybean oil. In this way, the producers manage to maintain the spot market value and pricing of sunflower oil.
The final verdict:
Cross commodity trading is an excellent, potent, and meaningful way to limit downside exposure for assets. As you have already revealed before, cross commodity hedging is primarily a risk management strategy. And, the success of this strategy widely depends on how strong and consistent a correlation is established to mitigate the possible risks of downside exposure.