Asymmetric Risk Exposure

Asymmetric Risk Exposure

A situation in which the potential gains and losses on an investment are uneven. For example, in an unhedged short sale, the potential gain is limited to the total potential loss of the underlying asset (because something cannot have less than no value), but potential losses are unlimited because the underlying asset could increase in value ad infinitum (resulting in a loss for the short seller). A collar option, on the other hand, may not have asymmetric risk exposure because the potential gains and losses are set at the beginning of the contract and are generally equal.
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