Overhedging: Difference between revisions
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"Overhedging" is a form of speculation. | "'''Overhedging'''" is a form of speculation. | ||
It means intentionally | 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]] | |||
Revision as of 16:54, 19 December 2012
"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.
