In relation to a hedging instrument/ hedged item and corresponding accounting treatment, it describes the situation where the cumulative change in the hedging instrument is less than the change in the hedged item (as measured in monetary or financial terms). Such a situation arises due to the standard size of contracts being used for the purpose of hedging.

For example, a transaction is said to be under-hedged if it involves the use of a futures or option position that does not fully cover the total cash market position.