Over-Hedging

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Over-Hedging

The practice of taking an offsetting position on an investment to reduce its risk where the offsetting position is greater than the original position. For example, one may buy 100 shares of AT&T and then buy a put option, giving one the right, but not the obligation, to sell 125 shares of AT&T. While this completely eliminates the risk associated with the first 100 shares declining in price, over-hedging creates a new risk for the extra 25 shares in the put contract.
References in periodicals archive ?
Propositions 3 and 4 show that, ex ante, the insurer can invest more aggressively in new opportunities that promise an above-market return at time 1, hedge less with products that appear very costly at time 1, and cut back on overpaying for and/or overhedging with products whose chief purpose is to improve distributional asymmetries.
Mortgage bankers are already increasingly aware of the potential dangers of overhedging.
The use of derivatives within structures to mitigate rising rate risk can create overhedging in a falling interest rate environment, which makes analyzing falling rate scenarios all the more vital,' said Kocagil.