Over-hedging
What is over-hedging, and why does a bank watch for it?
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BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED
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Over-hedging is holding hedges larger than the exposure they are meant to protect — a swap on more debt than the business has, forward contracts against sales that are no longer going to happen. The excess is no longer insurance but a position on rates or currency that gains or loses on its own, and a forward obliges delivery whether or not the sale it covered still exists. A bank sizes hedging lines to real exposures, and reads a hedge that has outlived its exposure as a position to be closed, not a protection to be kept.
BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.
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