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. A Beginner's Guide To Hedging
    Options & Futures

    A Beginner's Guide To Hedging

  2. Futures Fundamentals
    Insurance

    Futures Fundamentals

  3. Pick the Right Brokerage Account for ...
    Options & Futures

    Pick the Right Brokerage Account for ...

  4. The Top Technical Indicators For Options ...
    Options & Futures

    The Top Technical Indicators For Options ...

comments powered by Disqus
Hot Definitions
  1. Certificate Of Deposit - CD

    A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate ...
  2. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory ...
  3. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
  4. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
  5. Days Payable Outstanding - DPO

    A company's average payable period. Calculated as: ending accounts payable / (cost of sales/number of days).
  6. Net Sales

    The amount of sales generated by a company after the deduction of returns, allowances for damaged or missing goods and any ...
Trading Center