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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  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. 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 >>
  3. How do hedge funds use equity options?

    With the growth in the size and number of hedge funds over the past decade, the interest in how these funds go about generating ... Read Full Answer >>
  4. Can mutual funds invest in options and futures?

    Mutual funds invest in not only stocks and fixed-income securities but also options and futures. There exists a separate ... Read Full Answer >>
  5. How do futures contracts roll over?

    Traders roll over futures contracts to switch from the front month contract that is close to expiration to another contract ... Read Full Answer >>
  6. How does a forward contract differ from a call option?

    Forward contracts and call options are different financial instruments that allow two parties to purchase or sell assets ... Read Full Answer >>

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