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Risk reversal - Meaning

A strategy, such as an interest rate collar, whereby a party wishing to limit the potential downside of holding a long position in an underlying buys an out-of-the-money put and offsets the premium payable on the put with the sale of an out-of-the-money call. Alternatively, this can be a strategy whereby a party wishing to limit the potential downside of holding a short position in an underlying buys an out-of-themoney call and offsets the premium payable on the call with the sale of an out-of-the-money put.

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