In such unpredictable world risk management skill will help you not to end up in a hole. There are several methods how to cut risks, one of them is a hedge. In fact, it consists of taking an offsetting position in a related security, such as option contract. According to our portfolio, we underlined several risks and described the ways of reducing them. Chart 1. Investment Risks Interest Rate Risk is the possibility that a fixed-rate debt instrument will decline in value as a result of a rise in interest rates. We reduced this risk because we don't have bonds and preferred stocks in our investment portfolio. Business Risk is the measure of risk associated with a particular security. It is also known as unsystematic risk and refers to the risk associated with a specific issuer of a security. In fact, we don't have a possibility to manage companies from the portfolio and we can't result on it's financial performances. That is why the true method to diminish the risk is to diversify the stocks. Unfortunately, it was hard to do that because the majority of our shares belongs to the automotive industry. By the way, we selected stocks by it's financial reports and chart below proves the view, that automotive industry reversed the trend and has new prospective projects. Chart 2. SXAP and S&P 500 Also we have 4 shares from oil&gas, healthcare, consumer goods and banking. Surgutneftegas is one of the most sustainable companies in Russia and ruble devaluation covered all low oil prices costs. Gilead invented new drugs and there is no analog in the market. Black Friday 2015 and good dividends affected on our decision to include Ennis in our portfolio. JPMorgan is a giant financial conglomerate with giant assets, good financial performance against other blue chips in the industry. Credit Risk refers to the possibility that a particular bond issuer will not be able to make expected interest rate payments and/or principal repayment. In our case, we can analyze credit risk as a default risk, but, as it was previously mentioned, we are looking through only investment risks and companies with high profitability ratios have low bankruptcy risk. Taxability Risk applies to municipal bond offerings, and refers to the risk that a security that was issued with tax-exempt status could potentially lose that status prior to maturity. Therefore we can exclude this risk because we don't have bonds and at least we can carry it on the business risks. Call Risk is specific to bond issues and refers to the possibility that a debt security will be called prior to maturity. Call risk usually goes hand in hand with reinvestment risk, discussed below, because the bondholder must find an investment that provides the same level of income for equal risk. We have an equal situation as with taxability, credit and interest rate risks or to be more precise we don't have bonds. Inflationary Risk is the risk that future inflation will cause the purchasing power of cash flow from an investment to decline. Table 1. Inflation & Portfolio Dependency For rough calculating we decided to take the average inflation rate in companies' motherlands and multiply it with correspond share in portfolio. As you can see, high inflation rate is only in Russia estimated 1% per month, whereas Japan, Eurozone and USA have only about 0,2% per month. Therefore the total inflation risk estimates 0,3% per month, which isn't significant for investments. Liquidity Risk refers to the possibility that an investor may not be able to buy or sell an investment as and when desired or in sufficient quantities because opportunities are limited. In fact, we have 11 stocks listed in 3 different exchanges (NYSE, MOEX and FWB). Table 2. Portfolio Liquidity As you can see, we decided to chose the same method as it was in inflation calculations. Bid-ask spread was taken as a liquidity ratio. Here you can see that all stocks, listed on NYSE (TM, FCAU, THO GM, EBF, GILD, JPM) are higly liquid because the average spread is about 1-2 tick. Surgut is quite liquid for Russia and AVTOVAZ too. Unfortunately we have problem with NISSAN and it is hard to trade huge volumes on Daimler. The average total spread estimates 0,16% which shows that our portfolio is high-liquid, therefore it's affordable for various budgets. Market Risk is a risk that will affect all securities in the same manner. In other words, it is caused by some factor that cannot be controlled by diversification. In rough math, we can use β - as a market correlation. For cutting the risk we trying to make a β-neutral portfolio. Table 3. Market-Neutral Portfolio Initially we tried to find stocks with low β, and total 0,86 is a figure, which is under the average market level and it shows low dependency of the market. Reinvestment Risk is the risk that falling interest rates will lead to a decline in cash flow from an investment when its principal and interest payments are reinvested at lower rates. So, we excluded this risk because it doesn't suit our portfolio model. Social/Political /Legislative Risk is a risk associated with the possibility of nationalization, unfavorable government action or social changes resulting in a loss of value is called social or political risk. It is the hardest and the most unpredictable risk and there is no way how to manage it except of fast capital outflow. In our situation, USA, Europe and Japan have a low grade, whereas Russia has BB+ with negative forecast. Currency/Exchange Rate Risk is a form of risk that arises from the change in price of one currency against another. The constant fluctuations in the foreign currency in which an investment is denominated vis-à-vis one's home currency may add risk to the value of a security. As you can see, we deal with USD/EUR and USD/RUB therefore we think, that option hedging is suit for us because it is the only situation when you have really β-neutral position and your loses are limited by option cost. The rough cost of hedge is about 5-10% of the portfolio cost and plan option strategy is consists of USD/EUR and USD/RUB put options with February-March expiration date. Instead of sum up, we apologize for uncreated option strategy.