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| Overhedging is a form of speculation.
| | Ring-fenced financing vehicle. |
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| 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.
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| The effect of overhedging in this way is to create a new purely speculative position in the derivative instrument.
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| The size of the new speculative position is equal to the excess of the principal amount hedged, over 100%.
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| <span style="color:#4B0082">'''Example: Overhedging'''</span>
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| In the case above, the size of the new speculative position is 200% - 100% = 100%.
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| In other words equal in size to the original exposure being hedged.
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| The new speculative position is in the opposite direction to the original exposure.
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| == See also ==
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| * [[Hedging]]
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| * [[Underhedging]]
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| * [[MCT]]
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| [[Category:Manage_risks]]
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| [[Category:Risk_frameworks]]
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Revision as of 16:41, 7 March 2015
Ring-fenced financing vehicle.