Page 162 - AFM Integrated Workbook STUDENT S18-J19

Chapter 8

2.6 The Greeks – gamma, vega, rho, theta

 Gamma – measures the rate of change of delta as the underlying asset's price
changes

 Vega – measures the sensitivity of the option value to changes in the volatility

 Rho – measures the sensitivity of the option value to changes in the risk-free
rate of interest

 Theta – measures the rate of change in the value of the option caused by the
passage of time

2.7 Delta hedging

An investor can eliminate the risk of a shareholding by constructing a ‘delta hedge’.
This means selling call options in the proportion dictated by the delta as follows:

Number of call options to sell = Number of shares held / N(d 1).

150