IN 100 WORDS
Companies use FX hedging to manage currency risk. Over-hedging occurs when they use more hedging instruments (forwards, options) than needed, exceeding their actual exposure.
Inaccurate forecasts, economic shifts, poor risk management, or emotional trading can all lead to over-hedging.
Costs pile up from rolling over hedges, closing losing positions, and potential margin calls. Unfavorable exchange rates can hurt business performance.
A clear FX policy with a defined hedging strategy helps avoid over-hedging. Back-testing forecasts and considering market dynamics helps set appropriate hedge ratios.
Tip: Remember, aiming to minimize risk, not eliminate it, is key.
Harry Mills
FX Risk Management Expert
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