Question
A risk reversal strategy is defined as a long position in an out-of-themoney put and a short position in an out-of-the-money call (or vice versa).
A risk reversal strategy is defined as a long position in an out-of-themoney put and a short position in an out-of-the-money call (or vice versa). Consider the risk reversal strategy of long put with strike 85 and short call with strike 115 for maturity = 0.25 years. Let the current underlying price be S0 = 100, and interest rate r = 2%. Compare the prices of the risk reversal for the following implied volatility curves given as a function of strike price:
(i) f1(K) = 0.000167K2 0.03645K + 2.080.
(ii) f2(K) = 0.000167K2 0.03645K + 2.090.
(iii) f3(K) = 0.000167K2 0.03517K + 1.952.
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Market Practice In Financial Modelling
Authors: Tan Chia Chiang
1st Edition
9814366544, 978-9814366540
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