Risk hedging refers to a risk management strategy to offset the potential risk loss of basic assets by investing or buying some assets or derivatives that are negatively related to the fluctuation of basic assets.
Risk hedging is a very effective method to manage interest rate risk, exchange rate risk, stock risk and commodity risk. Different from the risk diversification strategy, risk hedging can manage systematic risk and non-systematic risk, and can also reduce the risk to the expected level by adjusting the hedging ratio according to the risk tolerance and preference of investors. The key problem of risk management by using risk hedging strategy lies in the determination of hedging ratio, which is directly related to the effect and cost of risk management.