FXfront-officeinstrument
Risk Reversal
Call-minus-put volatility at matched absolute delta.
01Intuition
Read the contractual cash flows first.
Risk reversal measures directional asymmetry in the smile.
ONE-LINE DEFINITION
Call-minus-put volatility at matched absolute delta.
02Mathematics
Express payoff and present value precisely.
Notation and units
Decimal rates and volatilities, year-fraction time and continuous compounding unless stated otherwise.
03Assumptions
Make conventions part of the contract.
01
Contract dates, calendars, settlement, notionals and payoff currency are part of the valuation input.
02
Discounting and projection conventions must match the collateral and quotation framework.
03
The displayed payoff omits legal terms and lifecycle events unless stated otherwise.
“An unstated convention is a future reconciliation break.”— THEQUANTBATEMAN
04Market use
Locate the quote and replication instruments.
Quotes skew and packages directional convexity exposure.
Intuition→Mathematics→Implementation→Desk risk
05Desk view
FRONT OFFICE VIEW
Map cash-flow changes into hedge risk.
Reconcile the contractual payoff before reading the FX risk. Small date or convention changes can move cash flows before any model parameter moves.
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