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 hedging a specific risk with a futures contract that is not directly related to the underlying asset being hedged. In this case, since there are no futures contracts available for home prices, cross-hedging with a related asset could be the best option. Lumber is often used as a proxy for the construction industry and could potentially be a good choice for cross-hedging the risk of home prices increasing. Gold, Treasury bonds, and crude oil are not as closely related to the housing market and would not be as effective for cross-hedging this particular risk.

You Plan on Paying Cash and Buying a Home Six