Risk Reversal (measure of Vol-skew)
Risk Reversal can refer 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.
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%.
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 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.
Read more about this topic: Risk Reversal
Famous quotes containing the words risk and/or reversal:
“It is not a piece of fine feminine Spitalfields silk—but is of the horrible texture of a fabric that should be woven of ships’ cables & hausers. A Polar wind blows through it, & birds of prey hover over it. Warn all gentle fastidious people from so much as peeping into the book—on risk of a lumbago & sciatics.”
—Herman Melville (1819–1891)
“Perversity depends on reversal and substitution.”
—Mason Cooley (b. 1927)