Risk reversal = Collar ??

CFA Level III
#21

I don’t know what to say.

1 Like
#22

Then you’re best off saying nothing.

It’s better to remain silent and have people think that you’re a fool, than to open your mouth and remove the doubt.

#23

haha this is being said for india’s namo now a days

#24

I learn something for life here, too, besides all the financial stuff. cheeky

#25

Everything NestorK said is right. Let’s do a quick recap on options

In FI/Equity market

Collar = long put, short call, and usaually a long stock

  • long put provides downside protection (limited downside)
  • short call provides premium income (limited upside)

Risk Reversal = long call, short put (a synthetic long position in the stock - mimicks long stock payoffs)

Short Risk Reversal = long put, short call (a synthetic short position in stock - mimick short stock payoffs)

Bull call spread = buy call, sell call at higher strike

Bear put spread = buy put, sell put at lower strike

Butterfly call spread = buy call, sell 2 calls at higher stirke, buy another call at even higher strike

Seagull call spread = call spread + short OTM put (short call, long call, short put - hence "seagull)

Boxspread = bull call spread + bear put spread = should earn risk free rate otherwise arbitrage oppotunity

In FX market ( foreign currency being the underlying)

Risk Reversal = long call, short put (creates a synthetic long position in the foreign currency )

Short Risk Reversal = long put, short call with no underlying ( synthetic short position in foreign currency)

Collar = long put, short call and long foreign currency exposure (long + syntheic short = hedged on both sides)

= long foreign currency + short risk reversal

Also, just a side note

A long put on foreign currency is equivalent to a long call on base currency so be aware of it if CFA decides to throw a curveball on this topic. Risk reversal of foreign currency is equivalent to short risk reversal of base currency.

#26

^ Thank you for sharing. Including the FX options is helpful. The CFAI text is less than crystal clear on some of that info.

1 Like
#27

Thanks for this!

#28

Tanx…

#29

RISK REVERSAL IS = - COLLAR

The former is usually applied to FX risk management with options (long call - short put) with different strikes to save some costs

#30

Yes and No; more No. :slight_smile:

Collar = short risk reversal + underlying

#31

wow this is wonderful - every time I read cfai text on this i get headache :frowning: - thx for peeling the onion.

is it safe to assume that synthetic means - same exercise price?

1 Like
#32

Can someone reply to thus?