Overdraft and Overhedging: Difference between pages
From ACT Wiki
(Difference between pages)
imported>Doug Williamson m (Amend header 2.) |
imported>Doug Williamson m (Removed italic/bold, spacing 21/8/13) |
||
Line 1: | Line 1: | ||
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 == | == See also == | ||
* [[ | * [[Hedging]] | ||
* [[ | * [[Underhedging]] | ||
Revision as of 14:44, 21 August 2013
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.