A company that mines bauxite, an aluminum ore, decides to short aluminum futures. This is an example of ________ to limit its risk.

Question

Quizplus · Accepted Answer

Cross-hedging is the practice of hedging a commodity using a futures contract for a related commodity. In this case, the company is hedging their risk by shorting aluminum futures, which is related to their primary commodity (bauxite). This helps them to limit their risk and protect their profits, should the price of aluminum decrease.

A Company That Mines Bauxite, an Aluminum Ore, Decides to Short