Overhedging and Price: Difference between pages

From ACT Wiki
(Difference between pages)
Jump to navigationJump to search
imported>Doug Williamson
(Standardise example titles)
 
imported>Doug Williamson
(Classify page.)
 
Line 1: Line 1:
Overhedging is a form of speculation.
An amount of money given or proposed in relation to a transaction, for example a financial transaction.


Usually, but not necessarily, quoted on the conventional basis for the market in question.


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.
Market prices include foreign exchange rates.


The size of the new speculative position is equal to the excess of the principal amount hedged, over 100%.


== See also ==


<span style="color:#4B0082">'''Example: Overhedging'''</span>
*[[Bid-offer price]]
 
* [[Cost]]
In the case above, the size of the new speculative position is 200% - 100% = 100%.
*[[Market price]]
 
*[[Market value]]
In other words equal in size to the original exposure being hedged.
*[[Rate]]
 
*[[Value]]
The new speculative position is in the opposite direction to the original exposure.
*[[Yield]]
 
 
== See also ==
* [[Hedging]]
* [[Underhedging]]
* [[MCT]]


[[Category:Manage_risks]]
[[Category:The_business_context]]
[[Category:Risk_frameworks]]
[[Category:Financial_products_and_markets]]

Revision as of 07:14, 2 July 2022

An amount of money given or proposed in relation to a transaction, for example a financial transaction.

Usually, but not necessarily, quoted on the conventional basis for the market in question.


Market prices include foreign exchange rates.


See also