Double Hedging

Double hedging refers to the practice of using two or more hedging strategies simultaneously to protect against potential financial losses. Investors or companies may hedge the same risk multiple times to provide extra security against adverse market movements. While this can reduce risk, double hedging can also be costly and, in some cases, may violate regulatory guidelines designed to prevent excessive risk mitigation. This strategy is often used in volatile markets where the potential downside is significant. However, double hedging can sometimes lead to over-hedging, where the cost of the hedge outweighs the benefits.

Example

A company that exports goods might hedge against currency risk by buying forward contracts and also taking out options on the same currency to ensure maximum protection.