Double Hedging

DEFINITION of 'Double Hedging'

Hedging a position by using futures and options, thereby doubling the size of the hedge. The Commodity Futures Trading Commission (CFTC) considers double hedging to be a situation where a trader holds a long futures position in a commodity in excess of the speculative position limit to offset a fixed price sale, even though the trader has ample supplies of the commodity to honor all sales commitments.

BREAKING DOWN 'Double Hedging'

Increasing the size of a hedge to a level that is greater than the exposure faced by a firm or individual may take it into the realm of speculation. For example, an investor with a stock portfolio of $1 million who wishes to hedge downside risk in the broad market can do so by buying put options of a similar amount on the S&P 500. Double hedging would occur if the investor also initiates an additional short position in the S&P 500 using index futures contracts.

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RELATED FAQS
  1. What is the difference between hedging and speculation?

    Hedging involves taking an offsetting position in a derivative in order to balance any gains and losses to the underlying ... Read Full Answer >>
  2. What is a derivative?

    A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, ... Read Full Answer >>
  3. What is after-hours trading? Am I able to trade at this time?

    After-hours trading (AHT) refers to the buying and selling of securities on major exchanges outside of specified regular ... Read Full Answer >>
  4. Do hedge funds invest in commodities?

    There are several hedge funds that invest in commodities. Many hedge funds have broad macroeconomic strategies and invest ... Read Full Answer >>
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    Mutual funds invest in not only stocks and fixed-income securities but also options and futures. There exists a separate ... Read Full Answer >>
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