Risk reversal

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[edit] Description

Risk reversal refers 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. 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.

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