You plan on paying cash and buying a home six months from now. Given this, you would like to hedge the price of a new home but there are no futures contracts written on home prices. However, by _____ you could offset some of that risk by writing a futures contract on _____.

Question

Quizplus · Accepted Answer

Cross-hedging involves using a futures contract on a related, but not identical, asset to hedge a risk. In this case, lumber is related to home prices because lumber is a significant cost component in home construction. Therefore, by cross-hedging with lumber futures, you can offset some of the risk associated with fluctuations in home prices.

You Plan on Paying Cash and Buying a Home Six