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The
Greeks are a
set
of factor sensitivities
used extensively by
traders to quantify the exposures of portfolios that contain
options.
Each measures how the portfolio's market value should respond to a change in
some variable—an underlier,
implied volatility, interest rate or time. There are
five Greeks:
 delta measures first order (linear) sensitivity to an underlier;
gamma measures second order (quadratic) sensitivity to an underlier;
vega
measures first order (linear) sensitivity to the implied volatility of an
underlier;
theta measures first order (linear) sensitivity to the passage of time;
rho
measures first order (linear) sensitivity to an applicable interest rate.
They are called the Greeks
because four out of the five are named after letters of the Greek alphabet. Vega
is the exception. For reasons unknown, it is named after the brightest star in
the constellation Lyra. At times, vega has been called kappa, but the name vega
is now well established.
Four of the five are
risk metrics. Theta is not because the passage of time in certain—it
entails no risk. Theta is akin to
the accrual of interest on a bond.
The Greeks are defined as
first—and in the case of gamma, second—partial derivatives. See articles on each
(linked above) for more information.
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 delta and gamma Factor sensitivities measuring
a portfolio's
first and second order (linear and quadratic) sensitivity to the value of an
underlier.
derivative
instrument An instrument
which derives its value from the value of other financial
instruments. Article includes a list of vanilla and exotic derivatives.
financial
risk management Practices by which a firm optimizes the
manner in which it takes financial risk.
market risk Exposure to the uncertain market value of a portfolio.
option pricing theory The
body of financial theory used by financial engineers to value options and other
derivative instruments.
option
spreads
Positions combining one or more options in a single underlier.
put-call
parity
A formula that relates the price of a put to the price of a
corresponding call.
rho Factor sensitivity measuring a portfolio's first order
(linear) sensitivity to the risk-free rate.
scenario analysis
Formalized "what if" analysis typically performed as a part of asset-liability management
or corporate risk management.
theta Factor sensitivity measuring a portfolio's first
order (linear) sensitivity to the passage of time.
value-at-risk A
category of market risk measures.
vega Factor sensitivity measuring a portfolio's first
order (linear) sensitivity to the implied volatility of an underlier.
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Natenberg (1994)
and Taleb (1996)
discuss the Greeks in the context of trading. Natenberg is
introductory. Taleb is a sophisticated book for professional
derivatives traders.
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Ads by Contingency Analysis
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 Greeks - Basics 18 Jul 2006
An insightful look at interdependencies between the Greeks. |
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http://www.contingencyanalysis.com
glossary direct link:
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