DEFINITION
Overhedging

"Overhedging": Overhedging is a form of speculation. It means intentionally "hedging" an amount GREATER THAN the total related risk exposure, for example by the use of a derivative instrument with a principal amount of 200% of the related risk exposure. The effect of overhedging in this way is to create a new purely speculative position in the derivative instrument. The size of the new speculative position is equal to the excess of the principal amount hedged, over 100%. For example in this case the size of the new speculative position is 200% - 100% = 100%. In other words equal in size to the original exposure being hedged. The new speculative position is in the opposite direction to the original exposure.
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