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| {{jargon|date=January 2013}}
| | Hi there, I am Alyson Pomerleau and I believe it seems fairly good when you say it. Some time ago he selected to live in North Carolina and he doesn't plan on changing it. Distributing production has been his profession for some time. She is truly fond of caving but she doesn't have the time lately.<br><br>Feel free to surf to my blog; [http://jplusfn.gaplus.kr/xe/qna/78647 love psychic] |
| '''Risk reversal''' can refer to a measure of the vol-skew or to an [[investment strategy]].
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| ==Risk Reversal investment strategy==
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| A risk-reversal consists of being short (selling) an out of the money put and being long (i.e. buying) an out of the money call, both with the same [[maturity (finance)|maturity]].
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| A risk reversal is a position in which you simulate the behavior of a long; therefore it is sometimes called a synthetic long. This is an investment strategy that amounts to both buying and selling out-of-money options simultaneously. In this strategy, the investor will first make a market hunch; if that hunch is bullish he will want to go long. However, instead of going long on the stock, he will buy an out of the money call option, and simultaneously sell an out of the money put option. Presumably he will use the money from the sale of the put option to purchase the call option. Then as the stock goes up in price, the call option will be worth more, and the put option will be worth less.<ref>http://www.quantprinciple.com/invest/index.php/docs/quant_strategies/riskreversal/ Theory of Risk Reversal</ref>
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| If an investor holds the underlying (stock or FX) and sells a risk reversal, then he has a [[Collar (finance)|collar]] position. i.e. <br>
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| : Underlying - Risk Reversal = [[Collar (finance)|collar]]
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| ==Risk reversal (measure of vol-skew)==
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| Risk Reversal can refer to the manner in which similar [[out-of-the-money]] [[option (finance)|call and put options]], usually [[foreign exchange option]]s, are quoted by [[Finance]] dealers. Instead of quoting these options' prices, dealers quote their [[Volatility (finance)|volatility]].
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| :<math>R_{25} = \sigma _{call,25} - \sigma _{put,25} </math>
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| In other words, for a given maturity, the 25 risk reversal is the vol of the ''25 delta call'' '''less''' the vol of the ''25 delta put''. The ''25 delta put'' is the put whose strike has been chosen such that the delta is -25%.
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| The greater the demand for an options contract, the greater its price and hence the greater its implied volatility. A positive risk reversal means the implied volatility of calls is greater than the implied volatility of similar puts, which implies a skewed distribution of expected spot returns composed of a relatively large number of small down moves and a relatively small number of large upmoves.
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| ==References==
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| <references/> | |
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| ==Other external links==
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| * Reuters description: http://glossary.reuters.com/index.php?title=Risk_Reversal
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| * Investopedia description: http://www.investopedia.com/terms/r/riskreversal.asp
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| * Quant Principle: [http://www.quantprinciple.com/invest/index.php/docs/quant_strategies/riskreversal/ Risk Reversal Case Study]
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| {{Derivatives market}}
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| [[Category:Options (finance)]]
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