Dynamic Hedging: Managing Vanilla and Exotic Options by Nassim Nicholas Taleb

Author:Nassim Nicholas Taleb
Language: eng
Format: epub, pdf
Published: 2007-10-06T10:54:00+00:00

All the other elements are straightforward.

The gamma of GBP 8,355,000 means that the position should increase by such amount should the market rally 1% and decrease likewise in a sell-off. This is an approximation: The position will not actually pick up such an amount in a rally owing to the third derivative (it is now at maximum gamma being at-the-money).

The vega is straightforward: $438,000 for a rise of 1 volatility percentage point.

The rho domestic corresponds to the sensitivity of the option to a change of 100 basis points in the U.S. rates. The Rho2 foreign corresponds to the same with the foreign rate. However, the Rhol is lower because it also is sensitive to the discounting of the premium the other way. The methods for calculating rhol and rho2 are as follows:

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