What Is Over-Hedging?
Over-hedging refers to a situation where an individual or organisation while attempting to mitigate risks through hedging strategies, ends up taking a position that exceeds the actual exposure they were trying to protect. This can happen when the quantity or size of the hedge is larger than necessary, leading to additional costs or complexities. Over-hedging can be a result of miscalculations, misjudgment of risk exposure, or overzealous risk aversion. While hedging is often employed to reduce risks, over-hedging can have its downsides, including increased expenses and potentially missing out on favourable market movements. Careful analysis and proper risk assessment are essential to avoid unintended consequences of over-hedging.
Table of Content
- What Causes Over-Hedging?
- Why Is Over-Hedging Bad?
- Effect Of Various Instruments on Over Hedged Positions
- Examples of Over-Hedging
- When to Hedge?
- Difference Between Overhedging and Underhedging