FRM Part I · FRM Exam Part I · Option Sensitivity Measures: The "Greeks"
A trader holds a European call option on a non-dividend-paying stock with a delta of 0.60. The stock price rises by USD 1.00, and no other inputs change. Using delta alone, what is the approximate change in the option price?
The option price rises by about USD 0.60. Delta is the first-order sensitivity of the option price to the underlying price, so a USD 1.00 stock increase multiplied by a delta of 0.60 gives an approximate USD 0.60 gain in the call's value.
- AIncrease of USD 0.40
- BIncrease of USD 0.60Correct
- CDecrease of USD 0.60
- DIncrease of USD 1.60
Explanation
Delta measures the change in option value per unit change in the underlying price. Change is approximately 0.60 x 1.00 = USD 0.60 increase. A USD 0.40 increase would use (1 - delta), which is not the call's sensitivity.
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