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:
“Better risk loss of truth than chance of error—that is your faith-vetoer’s exact position. He is actively playing his stake as much as the believer is; he is backing the field against the religious hypothesis, just as the believer is backing the religious hypothesis against the field.”
—William James (1842–1910)
“Perversity depends on reversal and substitution.”
—Mason Cooley (b. 1927)