Business and Personal Finance Dictionary

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• THEORY OF CROSS HEDGING
  
  Refers to a modification of the hedging process. It depends on hedging principles, practices and strategies but with a relaxation of strict standards of cash position specifications versus hedge instrument specifications. Often there can be a slight difference in grade, location, maturity, actual portfolio composition or product relative to the optimal hedge instrument. For example, treasury bond or note futures might be used in conjunction with To Be Announced securities (TBAs) to hedge mortgage backed securities portfolios. Mortgage backed securities are not deliverable against treasury bond futures, but there are features which improve the overall hedging efficiency by using blended hedges.
  
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