What is risk hedging?
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A simple old lady, with a backpack, went into the bank to deposit 500,000 US dollars. The president received her in the VIP room.
President: Your life savings?
Old lady: Where? I make a living by gambling, and I always win every time I gamble. I just won!
President: "Impossible!"
Old lady: "Then take a gamble. There will be a triangular birthmark on your buttocks tomorrow morning. The bet is 500,000!"
The president was hesitant and looked at a bag of cash and decided to gamble.
After the old lady left, the president went home and checked in the mirror several times. There was no birthmark until the next day at the appointed time, and then went to the VIP room.
The old lady arrived early, and a well-dressed lawyer stood next to her.
Old lady: Today the lawyer testified to check your buttocks.
President: "There is really no birthmark, let alone a triangular one." Then take off your pants and let them check your buttocks...
The old lady looked and said: "Sure enough, there is nothing. I lost."
At this time, the lawyer's face turned pale and he kept banging his head against the wall. The president was shocked. Lawyer: "She just bet me 1.5 million, saying that you will take off your pants in front of her and let her see your buttocks!"
This is called "risk hedging".
It is very important in the investment portfolio. When we make investments, we cannot only focus on the performance of a single asset and ignore the correlation between assets. Sometimes the loss of one asset will in turn lead to the profit of another asset. From a global perspective, the entire investment portfolio is profitable. Always remember that the return of the portfolio is our ultimate goal. Consider the correlation of assets and do a good job of hedging.
But the final result: The lawyer and the president set up a game to cheat the old lady's money. This is called killing pigs.