Greek Letters

Q: What are Greek letters?

A: These are hedge parameters such as Delta, Gamma, Vega and Theta. Each represents a risk associated with the change in the market variable. When a FI writes an option in an OTC market it has to hedge its position in an OTC market itself. Where hedging is far more difficult than an ET market because the products are customised instead standardised. Each Greek letter measure a different dimension of risk in an option position. Aim of the trader is to manage all the Greeks in a manner that the risks become acceptable.

Q: What is Delta Hedging?

A: It's a hedging scheme designed with the purpose of making the price of the portfolio of derivatives insensitive to the changes in the price of the underlying asset i.e making the portfolio delta neutral. Since, delta of an option is always less than 1, number of shares needed to hedge an option position is always less than the number of shares on which the FI writes an option. Since the delta of an option is not constant and it keeps changing, the portfolio needs rebalancing i.e the number of shares required for hedging also keeps changing. There are two types of hedging schemes: Dynamic and Static.