Risk reversals as a hedging strategy in foreign exchange market

From the real estate sector based global financial crisis which emerged in the U.S.A. in 2007 and spread all over the world, forex market has been affected most. Due to the effects of global financial crisis, it is extremely difficult to do analysis on forex market, regarding especially the policies of central banks. Significant changes on volatility levels were observed and there have been critical disruptions even on strong, long standing correlations between assets. In this study, relations between parities that traded in forex market most during the period after the peak of global financial crisis --Lehman Brothers? bankruptcy-- and risk reversal datas which are calculated from the difference between the implied volatilities of call and put options where these parities are underlying assets are examined and it is aimed to draw the attention of market actors who invest in the forex market to the importance of risk reversals. For this reason the relations between the AUD/USD, EUR/USD, GBP/USD, USD/CAD, USD/CHF and USD/JPY parities from 09.16.2008 to 12.31.2012 and 3-Month 25-Delta Risk Reversal datas were analyzed. As a result of these analyzes, it has been observed that risk reversals are more successful and more useful on giving signals for changes in trend rather than estimating price levels of the parities in the future. Keywords: Foreign Exchange Market, Options, Implied Volatility, Risk Reversals