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Reverse Equity Risk Reversal
Payoff Pattern of a Reverse Equity Risk Reversal
Typically, a combination of a short out-of-the-money put, a long out-of-the- money call, and a short futures or cash market position. This combination is the mirror image of the traditional range forward or equity risk reversal structure (see diagram). This structure is generally used when a simple short swap or futures transaction with unlimited exposure to extreme market movements does not meet risk control objectives. As the diagram illustrates, the value of the investor's position will increase if the value of the underlying declines and will fall if the value of the underlying increases-with a limit on the downside-in the case of a market advance-and on the upside-in the case of a market decline. Also called Reverse Range Forward, Reverse Forward Rate Bracket. See also Bear Spread (diagram).
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Glossary *
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