Risk Reversal / FX Collar

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

Long Risk Reversal

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:

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

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:

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.