Page 174 - DMGT513_DERIVATIVES_AND_RISK_MANAGEMENT

Unit 12: Risk Management with Derivatives I

Standard deviation of returns on a stock = 0.4 Notes
Spot price of the stock = ` 60
Compute
(i) Price of the call option

(ii) Its delta
(iii) Gamma

Self Assessment

Fill in the blanks:
13. ……….. refers to riskless profit earned by taking positions in spot/futures markets.

14. When the underlying asset is expected to be bullish (rising prices), the speculator opts for
…………. futures.
15. When the underlying asset is expected to be bearish (falling prices), the speculator opts for
…………… futures.

12.5 Summary

 The sensitivity analysis of option premium deals with the measurement of changes in
option price due to the change in the underlying parameters that determine the option
prices.
 Delta is a measure of the sensitivity the calculated option value has to small changes in the
share price.
 Delta is positive for a bullish position (long call and short put) as the value of the position
increases with rise in the price of the underlying.
 Delta is negative for a bearish position (short call and long put) as the value of the position
decreases with rise in the price of the underlying.

 Gamma is a measure of the calculated delta's sensitivity to small changes in share price.
 The gamma of an option tells you how much the delta of an option would increase or
decrease for a unit change in the price of the underlying.

 Vega measures the calculated option value's sensitivity to small changes in volatility.
 The rho may be defined as the rate of change in the value of option premium to the
domestic interest.

 A position in the futures markets is taken to offset the effect of the price of the commodity
on the rest of the company business.

 The most common hedging strategies are known as "going long," and "going short", also
referred to as Long Hedge and Short Hedge respectively.
 When the underlying asset is expected to be bullish (rising prices), the speculator opts for
buying futures; whereas when the underlying asset is expected to be bearish (falling
prices), the speculator opts for buying futures.
 Arbitrage refers to riskless profit earned by taking positions in spot/futures markets.

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