Risk Reversal / FX Collar
Also known as a FX Collar, Corridor, or Cap and Floor strategy
Last updated
Also known as a FX Collar, Corridor, or Cap and Floor strategy
Last updated
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.
Payoff Diagram:
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.
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.
Payoff Diagram:
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.