Risk Reversal

Risk Reversal
1. In commodities trading, it is a hedge strategy that consists of selling a call and buying a put option. This strategy protects against unfavorable, downward price movements but limits the profits that can be made from favorable upward price movements.

2. In foreign-exchange trading, risk reversal is the difference in volatility (delta) between similar call and put options, which conveys market information used to make trading decisions.

1. For example, say Producer ABC purchased an $11 June put option and sold a $13.50 June call option at even money (put and call premiums are equal). Under this scenario, the producer is protected against any price moves in June below $11 but the benefit of upward price movements reaches the maximum limit at $13.50.

2. Risk reversal refers to the manner in which similar out-of-the-money call and put options, usually FX options, are quoted by dealers. Instead of quoting these options' prices, dealers quote their volatility. The greater the demand for an options contract, the greater its volatility and its price. A positive risk reversal means the volatility of calls is greater than the volatility of similar puts, which implies that more market participants are betting on a rise in the currency than on a drop, and vice versa if the risk reversal is negative. Thus, risk reversals can be used to gauge positions in the FX market and can convey information to make trading decisions.


Investment dictionary. . 2012.

Игры ⚽ Поможем сделать НИР

Look at other dictionaries:

  • Risk reversal — DescriptionRisk reversal refers to the manner in which similar out of the money call and put options, usually foreign exchange options, are quoted by Finance dealers. Instead of quoting these options prices, dealers quote their volatility. The… …   Wikipedia

  • Risk Reversal —    An option strategy involving the purchase of a put and the sale of a call, or vice versa, with different strike levels. The premium generated from the sale of an option could partly or totally finance the premium to be paid for the purchase of …   Financial and business terms

  • Tubal reversal — short for tubal sterilization reversal or tubal ligation reversal is a surgical procedure that restores fertility to women after a tubal ligation. By rejoining the separated segments of fallopian tube, tubal reversal gives women the chance to… …   Wikipedia

  • cal|cu|lat|ed risk — «KAL kyuh LAY tihd», a possibility of failure or reversal that is accepted as unavoidable in an undertaking: »Several writers have emphasized that any use of atomic energy entails a calculated risk, no less than those features of modern… …   Useful english dictionary

  • Collar (finance) — In finance, a collar is an option strategy that limits the range of possible positive or negative returns on an underlying to a specific range. Contents 1 Equity Collar 1.1 Structure 1.2 Example 2 …   Wikipedia

  • Stratégies optionnelles — En finance, un stratégie optionnelle consiste à acheter et/ou vendre plusieurs options (calls et puts) et éventuellement de l actif sous jacent, dans le but de bénéficier des mouvements, ou de leur absence, anticipés du marché du sous jacent ou… …   Wikipédia en Français

  • Debit spread — In finance, a debit spread, AKA net debit spread, results when an investor simultaneously buys an option with a higher premium and sells an option with a lower premium. The investor is said to be a net buyer and expects the premiums of the two… …   Wikipedia

  • Options strategies — can favor movements in the underlying that are bullish, bearish or neutral. In the case of neutral strategies, they can be further classified into those that are bullish on volatility and those that are bearish on volatility. The option positions …   Wikipedia

  • Credit default swap — If the reference bond performs without default, the protection buyer pays quarterly payments to the seller until maturity …   Wikipedia

  • Volatility smile — In finance, the volatility smile is a long observed pattern in which at the money options tend to have lower implied volatilities than in or out of the money options. The pattern displays different characteristics for different markets and… …   Wikipedia

Share the article and excerpts

Direct link
Do a right-click on the link above
and select “Copy Link”