Over-hedging describes the situation of a firm that has hedged in anticipation of an exposure that has failed to materialise completely. Over-hedging is common in companies with low forecast accuracy that apply static hedging, with a big hedge taken at the start of the period. If these positions.
Firms that find themselves in a situation of over-hedging should unwind some of their hedges in order to free up collateral and increase the firm’s borrowing capacity—a top-priority in situations of stress in credit markets. Over-hedging can be overcome with the right budget hedging program or combination of programs that mix elements of static and dynamic hedging.