Risk hedging refers to a risk management strategy that offsets the potential risk losses of the underlying asset by investing or purchasing certain assets or derivatives that are negatively correlated with the fluctuations in the underlying asset's returns.

Risk hedging is a very effective way to manage interest rate risk, exchange rate risk, stock risk and commodity risk. Unlike risk diversification strategies, risk hedging can manage systemic risks and non-systematic risks, and can also reduce risks to expected levels through the adjustment of hedging ratios based on investors' risk tolerance and preferences.

The key issue in using risk hedging strategies to manage risks is the determination of the hedging ratio, which is directly related to the effectiveness and cost of risk management.

Risk hedging case:

If you buy a stock at a price of 10 yuan, the stock may rise to 15 yuan or fall to 7 yuan in the future. Your expectations for returns are not too high. What's more important is that you don't want to lose as much as 30% if the stock falls. What can you do to reduce your risk if stocks decline?

One possible solution is: you buy the stock and buy a put option on the stock at the same time - an option is a right (not an obligation) that can be exercised in the future, such as here The put option may be the right to "sell the stock at a price of 9 yuan one month later";

If the stock price is lower than 9 yuan a month later, you can still sell it at a price of 9 yuan, The issuer of the option must accept the order in full; of course, if the stock price is higher than 9 yuan, you will not exercise this right (wouldn't it be better to sell it on the market for a higher price). For giving you this optional right, the issuer of the option will charge you a certain fee, which is the option fee.

Originally, your stocks may bring you 50% gain or 30% loss. When you simultaneously buy a put option with an exercise price of 9 yuan, the profit and loss situation changes: the possible income becomes.

(15 yuan-10 yuan-option fee)/10 yuan?

The possible loss becomes:

(10 yuan-9 yuan + option fee)/10 yuan

Potential gains and losses have become smaller. By buying a put option, you pay part of the potential profit in exchange for risk aversion.

Extended information:

Risk hedging role

Risk hedging is a very effective way to manage interest rate risk, exchange rate risk, stock risk and commodity risk. Unlike risk diversification strategies, risk hedging can manage systemic risks and non-systematic risks, and can also reduce risks to expected levels through the adjustment of hedging ratios based on investors' risk tolerance and preferences.

The key issue in using risk hedging strategies to manage risks is the determination of the hedging ratio, which is directly related to the effectiveness and cost of risk management.

Types of risk hedging

Risk hedging of commercial banks can be divided into two situations: self-hedging and market hedging.

Self-hedging means that commercial banks use the hedging characteristics of their balance sheets or certain business portfolios that are negatively correlated with returns to conduct risk hedging.

Market hedging refers to hedging through the derivatives market for risks that cannot be self-hedged through balance sheet and related business adjustments (also known as residual risk).

Baidu Encyclopedia-Risk Hedging