Product Overview

This technical note addresses the basics of risk measure for options. It introduces the different risk measures for options: Delta, Gamma, Vega, Rho, and Theta. Although the note focuses primarily on price risk (Delta) and the Delta risk (Gamma), it does address volatility risk (Vega), interest-rate risk (Rho), and time decay (Theta). In addition to providing derivations and basic calculations, the note provides a full description of Delta hedging.

Learning Objectives

The key objectives of this note are to provide students with the basic of derivative risk management. It shows students how to calculate each risk measure and in a limited way provides some overview of application. Coupled with a good set of discussion questions, this note is an effective way of giving students an understanding of the different measures of risk and how they are used.