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Risk Reversal Help
Morning everyone - Need some help working out what the vols should be on a risk reversal, and was wondering if there is a formula i can use ?For example if i had 2yr EURCZK 25dta RR at 0.2 - what should the vols be ?thanks for your help
Risk Reversal Help
Good morning,vols on a RR are taken from the corresponding calls and puts.the formula for 1 year is 1yr EURCZK 25dta Call vol - 1yr EURCZK 25dta Put vol.eg, 1yr EURCZK 25dta Call vol spot = 4.871yr EURCZK 25dta Put vol spot = 4.57This gives you a 0.30Call 25DRRYou can have the same using Butterfly data and corresponding calls and puts.
Risk Reversal Help
QuoteOriginally posted by: mihailGood morning,vols on a RR are taken from the corresponding calls and puts.the formula for 1 year is 1yr EURCZK 25dta Call vol - 1yr EURCZK 25dta Put vol.eg, 1yr EURCZK 25dta Call vol spot = 4.871yr EURCZK 25dta Put vol spot = 4.57This gives you a 0.30Call 25DRRYou can have the same using Butterfly data and corresponding calls and puts.Thats just what the RR is trading at... i mean what vols used when trading it, if you KNOW the RR is 0.3... How can you find out what the vols or the put and the call are ?
Risk Reversal Help
QuoteOriginally posted by: tricky69Thats just what the RR is trading at... i mean what vols used when trading it, if you KNOW the RR is 0.3... How can you find out what the vols or the put and the call are ?I'd suggest reading Malz's paper:Option-Implied Probability Distributions and Currency Excess ReturnsIt'll be better for you to follow the reasoning there than just applying a formula (which you should find searching the forum anyway).Good luck.
Risk Reversal Help
The RR quote on its own is not enough to find out what the vols of the individual calls and puts are. An approximate relationship that most houses use is:call25DVol = ATMVol + 0.5*RR25DVol + STR25DVolput25DVol = ATMVol - 0.5*RR25DVol + STR25DVol but as you see you need the ATMVol and STR quotes as well.Rgds