Over-Hedging

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.

BREAKING DOWN '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.

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RELATED FAQS
  1. Can you invest in hedge funds?

  2. How are futures used to hedge a position?

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  4. Why do companies enter into futures contracts?

    Learn how companies use futures contracts for the purposes of hedging their exposure to price fluctuations as well as for ... Read Answer >>
  5. What happens if you don't hedge your investments?

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  6. What is the difference between hedging and speculation?

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