Risk reversal = Collar ??

CFA Level III
#1

The same? Or which one should have underlying?? Confused…

#2

CFA Institute Level III curriculum, v. 4, p. 54:

6.3.3 Risk Reversal (or Collar)

#3

Thanks! Both of them need underlying? (Like protective put)

#4

A collar does not need an underlying per se, does it?

Collar: underlying, buy a put @ strike low and sell a call @ strike high

But, it would work, too: buy a call @ strike low and sell call @ strike high (thats refered to bear spread)

#5

Ok, I revisit the curriculum and believe risk reversal = - collar

They are upside down.

In professional FX markets, having a long position in a call option and a short position in a put option is called a risk reversal. For example, buying a 25-delta call and writing a 25-delta put is referred to as a long position in a 25-delta risk reversal. The position used to create the collar position we just described (buying a put, writing a call) would be a short position in a risk reversal.

Collar: buy put + sell call

Thus,

Long collar = short risk reversal

#6

A collar has the same payoff as a bull spread, but it includes owning the underlying.

#7

^ You are right.

#8

Sorry, guys, you have it all wrong.

A collar is selling a call, buying a put and holding the underlying. So you have limited upside (you sold the call) and limited downside (you hold the put). You have limited risk either way, but you have to hold the underlying. If not you face unlimited losses if prices go up.

A risk reversal is holding a call and selling a put (without the underlying). it is similar to holding the underlying stock (They also call it synthetic long). unlimited upside and unlimited downside (until stock price reaches zero). If you would hold the underlying as well, than you would double down in both directions.

So if you consider that risk reversal is same as underlying, than: Underlying + SHORT risk reversal = equity collar.

#9

^ how can s2000 wrong!!!

#10

I believe short risk reversal = long collar

Why you only limited it to equity only???

#11

As I said?: Collar: underlying, buy a put @ strike low and sell a call @ strike high

  • CFAI states that long call, short put (and underlying) is a risk reversal and a collar is short risk reversal …refer to page 6.3.3 that S2000 mentioned
#12

No, I mean underlying + bull spread = collar

#13

short risk reversal is not equal to a long collar.

short risk reversal + the underlying = long collar.

#14

short risk reversal = short underlying.

#15

Jep.

#16

You really made me work here:

CFA says this:

quote

In professional FX markets, having a long position in a call option and a short position in a put option is called a risk reversal. For example, buying a 25-delta call and writing a 25-delta put is referred to as a long position in a 25-delta risk reversal. The position used to create the collar position we just described (buying a put, writing a call) would be a short position in a risk reversal. unquote

Check the last sentence: The position used to create the collar position we just described (buying a put, writing a call) would be a short position in a risk reversal.

The short risk reversal is used to make a collar. It is not equal. Again, you hold the underlying, you go short a risk reversal (same payoff as short underlying) and you get a collar (which is limited on the up and downside.

What you could do is go long a risk reversal (synthetic long, same as underlying) and short a risk reversal (synthetic short, same as short underlying). Then again, you would have a collar (neither long nor short the stock).

1 Like
#17

Now I believe you are right! Cheers!

#18

(synthetic long) underlying = risk reversal

Nice.

laugh

#19

R u guys for real?

Risk reversal is collar. Period.

Collar without the underlying becomes a bull spread (in shape)

CFA candidates without confusing themselves become CFA Charterholders.

#20

^ I like your last sentence…