Overhedging: Difference between revisions
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Overhedging is a form of speculation. | |||
It means intentionally hedging an amount GREATER THAN the total related risk exposure, for example by the use of a derivative instrument with a principal amount of 200% of the related risk exposure. The effect of overhedging in this way is to create a new purely speculative position in the derivative instrument. | |||
It means intentionally hedging an amount GREATER THAN the total related risk exposure, for example by the use of a derivative instrument with a principal amount of 200% of the related risk exposure. | |||
The effect of overhedging in this way is to create a new purely speculative position in the derivative instrument. | |||
The size of the new speculative position is equal to the excess of the principal amount hedged, over 100%. | The size of the new speculative position is equal to the excess of the principal amount hedged, over 100%. | ||
<span style="color:#4B0082">'''Example: Overhedging'''</span> | |||
In the case above, the size of the new speculative position is 200% - 100% = 100%. | |||
In other words equal in size to the original exposure being hedged. | In other words equal in size to the original exposure being hedged. | ||
The new speculative position is in the opposite direction to the original exposure. | The new speculative position is in the opposite direction to the original exposure. | ||
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* [[Hedging]] | * [[Hedging]] | ||
* [[Underhedging]] | * [[Underhedging]] | ||
[[Category:Manage_risks]] | |||
[[Category:Risk_frameworks]] | |||
Latest revision as of 20:23, 9 February 2019
Overhedging is a form of speculation.
It means intentionally hedging an amount GREATER THAN the total related risk exposure, for example by the use of a derivative instrument with a principal amount of 200% of the related risk exposure.
The effect of overhedging in this way is to create a new purely speculative position in the derivative instrument.
The size of the new speculative position is equal to the excess of the principal amount hedged, over 100%.
Example: Overhedging
In the case above, the size of the new speculative position is 200% - 100% = 100%.
In other words equal in size to the original exposure being hedged.
The new speculative position is in the opposite direction to the original exposure.
