Over Hedging occurs when a company or investor hedges more than the actual exposure, leading to additional risk instead of reducing it.
Hedging is meant to reduce risk, but when the hedge position exceeds the actual underlying exposure, it becomes over hedging.
This can result in unexpected losses, especially if market prices move in the opposite direction of the excess hedge.
Over hedging is commonly seen in derivatives markets, such as futures, options, and forward contracts.
👉 Hedging should match exposure—not exceed it
"A company expects to receive $1 million but hedges $1.5 million—extra $0.5 million exposure creates risk → over hedging."