What is the reversal of the risk?
Risk reversal is a term that can be used to indicate two different situations within the investment process. When using with reference to commodity trading, this term identifies the type of strategy that includes the purchase of PUT and at the same time sells a similar call option. As it concerns foreign exchange business activities, the reversal of the risk is defined by the relationship between PUT and CALL. With foreign exchange or FX trading, reversal can be interpreted as positive or negative.
One of the best ways to understand how a reverse risk works in commodity trading, it is assumed that the investor decides to purchase the PUT option while selling the possibility of calling for a slightly higher price. Assuming that the premiums on both transactions are similar, it creates a situation in which the investor does not have to worry about any declining price movements that would fall below the price of the PUT. At the same time, it stands by investor from any ascending movement that is more than the price of the option,But lower than the price of calls. While profits that can be obtained from this arrangement are limited by the price of calling options, many investors consider it an effective way to prevent loss, and are comfortable with a modest opportunity to increase their return.
Since it concerns FX trading, reversal of the risk is solved by the amount of risk or volatility, which is present with a specific set of PUT and CALL. The aim is to determine whether the expected movement of the closed option will result in negative or positive conversion. If there is a high demand for options for options, volatility increases with increasing price. With a positive risk reversal situation, the volatility of the call option is higher than the PUT volatility. If the possibility of Putrisiko is higher than the risk of calling, then it is said that the contract carries a negative reversal of risk.
in both settings is the value of the calculation of the reversal of the risk,that investors can use the data to help them take informed investment decisions. With a commodity trade, the investor can find out whether the difference between PUT and Call will lead to sufficient potential for the desired amount of profit, due to reduced amounts of related risks. For foreign exchange trades, it allows to identify the nature of the reversal of the risk of assessing whether the trade is likely to bring the results required by the investor; If not, an agreement can be avoided and the investor may consider other options.