Over-Hedging

AAA

DEFINITION of 'Over-Hedging'

A hedged position in which the offsetting position is for a greater amount than the underlying position held by the firm entering into the hedge. The over-hedged position essentially locks in a price for more goods, commodities or securities than is required to protect the position held by the firm.

INVESTOPEDIA EXPLAINS 'Over-Hedging'

For example, if a firm entered into a January futures contract to sell 25,000 mm Btu at $6.50/mm Btu but the firm had only an inventory of 15,000 mm Btu that they're trying to hedge, but due to the size of the futures contract the firm now has excess futures contracts that amount to 10,000 mm Btu, this would be a speculative investment.

RELATED TERMS
  1. Double Hedging

    Hedging a position by using futures and options, thereby doubling ...
  2. Super Hedging

    A strategy that hedges positions with a self-financing trading ...
  3. Speculation

    The act of trading in an asset, or conducting a financial transaction, ...
  4. Chicago Mercantile Exchange - CME

    The world's second-largest exchange for futures and options on ...
  5. Chicago Board Of Trade - CBOT

    A commodity exchange established in 1848 that today trades in ...
  6. Hedge

    Making an investment to reduce the risk of adverse price movements ...
Related Articles
  1. Options & Futures

    A Beginner's Guide To Hedging

  2. Insurance

    Futures Fundamentals

  3. First time stock investors may ask, is there any way to buy insurance on stocks to prevent losses?
    Options & Futures

    Stock Safety: Top 3 Ways to Limit Your ...

  4. Options & Futures

    Applying Binary Options To Equity Markets

Hot Definitions
  1. Conduit Issuer

    An organization, usually a government agency, that issues municipal securities to raise capital for revenue-generating projects ...
  2. Financing Entity

    The party in a financing arrangement that provides money, property, or another asset to an intermediate entity or financed ...
  3. Hyperinflation

    Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is ...
  4. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
  5. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  6. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
Trading Center