Over-Hedging

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 ?
9005 Note: The contract size of [pounds sterling]100,000 has been chosen to avoid under--or over-hedging.
Paper P3 foreign currency hedging: many P3 students understand the principles behind foreign currency hedging techniques but struggle to demonstrate the calculations in an exam. Let's get some practice on how to figure out those numbers
Companies should be wary of over-hedging their risks against high energy prices as the price could drop, leaving them holding the bag.
U.S. Credit Rating Washed Away, Stock Market Famine Ensues - Are Locusts Next?
Over-hedging occurred in six months and under-hedging occurred during 12 months.
Switching options and the impact on business strategy and risk management
Where complete data isn't available, some companies may be conservative in their hedging strategies to avoid over-hedging.
Driving new efficiencies in treasury
On the other hand, four futures contracts would represent an over-hedging of C$58,000.
Hedging foreign currency transaction exposure
Mr Wheeler went on: 'This does not mean that hedging should be avoided it is of course essential to avoid undue risk but that over-hedging would not be cost-effective in the medium or long term.
Striking duo wide of IG profits goal
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