Overhedging

"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%.

For example in this case 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.

See also

• Hedging
• Underhedging