RISK REVERSALS AND THE FX SKEW (MASTER FX OPTIONS OTC Currency Options and the Carry Trade BOOK 3) - Softcover

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Ask a retail trader what the risk reversal is pricing and, if they can answer at all, they'll call it a footnote on the smile, a number to check once and file away. That's incomplete. The risk reversal is the one number in the entire FX options market that continuously prices how much insuring against a currency's crash is actually worth right now, not a proxy for that price, the price itself. A bare signed number like "−1.80" tells you nothing on its own, which is why this book insists on stating direction every time: 1M 25-delta RR, minus 1.80 vol, JPY calls over. That ambiguity is one of the more consequential terminology traps in the subject.

The reason the number leans the way it does isn't arbitrary. A risk reversal is bid on whichever currency funds the carry trade built on top of that pair, the option that pays off if the funding currency suddenly strengthens, which is exactly what happens when a carry trade unwinds. In USD/JPY, the yen funds the trade, so JPY calls are perpetually bid. The logic travels: in pairs where the dollar itself is the funding currency instead: USD/BRL, USD/MXN, USD/TRY — the skew points the other way. From there the book builds the trade itself: constructed outright, delta-hedged to isolate the skew view from the directional exposure riding alongside it, or structured zero-cost, three different trades wearing the same combo's clothing. Extremes get read the way a desk reads them, by percentile against trailing history, a live crowding gauge distinct from lagging positioning data.

It closes on the discipline retail writing skips: telling an honestly priced risk apart from a crowded trade feeding its own demand, then running that checklist against the real 2026 USD/JPY setup, where the answer is often no trade at all. Book Three of a series built on one rule: a number you can read but not construct is a fact, not an edge.

The MASTER FX OPTIONS Series:
Book 1: The FX Volatility Surface
Book 2: The Carry Trade Is a Short Option
Book 3: Risk Reversals and the FX Skew
Book 4: Butterflies, Strangles, and the Wings
Book 5: Trading the Central Banks
Book 6: EUR Crosses and the Cross-Currency Surface

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