> For the complete documentation index, see [llms.txt](https://eako-capital.gitbook.io/eako-user-guide/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://eako-capital.gitbook.io/eako-user-guide/risk-reversal-fx-collar.md).

# Risk Reversal / FX Collar

Also known as a FX Collar, Corridor, or Cap and Floor strategy

## Long Risk Reversal

{% hint style="info" %}
The collar is one of the most conservative forward hedges available. Through the combination of the buying and selling of a pair of OTM options, the Collar provides a hedge whereby the client's FX risk is locked within a "range", between a Guaranteed Strike Rate and a Best Case Rate .

The strategy may also be referred to as a Risk Reversal, Cap and Floor, Range Forward, or Corridor.
{% endhint %}

**Payoff Diagram:**

<figure><img src="https://3557203473-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2FYQ7mk2lqrd7KNTuAuSYT%2Fuploads%2FFSgtfmQNPGBKD5MvYPi7%2FRHS%20Collar.png?alt=media&amp;token=1830bde8-3b47-4cec-9554-4be943edd328" alt="Long FX Collar Payoff Profile"><figcaption></figcaption></figure>

### **Payoff at Expiry:**

At expiry if EURUSD fixes:

* Above the Call Strike, the client is fully protected at the Call Strike on 100% of the Notional.  The profit on the derivative will fully net off against the loss on the underlying exposure.
* Between the Call Strike and the Put Strike, the client can participate in the favourable movement and transact at the improved Spot Rate.
* Below the Put Strike, the client will find itself obligated to trade at the Put Strike level on 100% of the Notional.

## Short Risk Reversal

{% hint style="info" %}
A Short Risk Reversal is a bearish strategy which involves the simultaneous sale of an OTM Call and a purchase of an OTM Put of the same expiration. This can be done for either a net credit or debit, depending on the strikes chosen.&#x20;
{% endhint %}

**Payoff Diagram:**

<figure><img src="https://3557203473-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2FYQ7mk2lqrd7KNTuAuSYT%2Fuploads%2FCMcburTBVljOjSsYeedw%2FEURUSD%20Collar%20LHS.png?alt=media&amp;token=0e9b7537-00f3-45d5-8db1-c808cdecc7c2" alt=""><figcaption></figcaption></figure>

### **Payoff at Expiry:**

At expiry if EURUSD fixes:

* Above the Call Strike, the client will find itself obligated to trade at the Call Strike level on 100% of the Notional.
* Between the Call Strike and the Put Strike, the client can participate in the favourable movement and transact at the improved Spot Rate.
* Below the Put Strike, the client is fully protected at the Put Strike on 100% of the Notional.  The profit on the derivative will fully net off against the loss on the underlying exposure.