Risk reversal = Collar ??

JJ1337 wrote:I don’t know what to say.
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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.
 
S2000magician wrote:
JJ1337 wrote:I don’t know what to say.
Click to expand...
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.
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haha this is being said for india’s namo now a days
 
I learn something for life here, too, besides all the financial stuff.
 
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.
 
^ Thank you for sharing. Including the FX options is helpful. The CFAI text is less than crystal clear on some of that info.
 
cgy5478 wrote:
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.
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Thanks for this!
 
cgy5478 wrote:
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.
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Tanx…
 
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