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CM2: Financial Engineering & Loss Reserving
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Module 9
Option Price Sensitivities: The Greeks
1
Understanding Delta: Price Sensitivity & Hedge Ratio
Define delta and interpret it as both a measure of price sensitivity and a hedge ratio.
2
Understanding Gamma: Delta's Sensitivity to Price Changes
Define and interpret gamma as the sensitivity of delta to a change in the underlying price.
3
Understanding Vega: Volatility Sensitivity
Define and interpret vega as the sensitivity to a change in volatility.
4
Understanding Theta: Time Decay in Options
Define and interpret theta as the sensitivity to the passage of time (time decay).
5
Understanding Rho: Interest Rate Sensitivity
Define and interpret rho as the sensitivity to a change in the risk-free interest rate.
Calculating European Option Greeks
Calculate the primary Greeks (delta, gamma, vega, theta) for European options.
7
Building Delta-Neutral Portfolios
Construct a delta-neutral portfolio using options and the underlying asset.
8
Dynamic Hedging and Delta-Gamma Neutral Portfolios
Explain the concept of dynamic hedging and the goal of a delta-gamma neutral portfolio.
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The Black-Scholes-Merton Model
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Interest Rate and Credit Risk Modeling