Skip to content

FRM Part I · FRM Exam Part I · Option Sensitivity Measures: The "Greeks"

A trader is delta-neutral with a portfolio gamma of -2,500 (per $1 move in the stock, in share-equivalents). The stock suddenly rises by $2. Using the delta-gamma approximation, what is the portfolio's delta immediately after the move, and what rebalancing restores neutrality?

Delta becomes -5,000 and the trader must buy 5,000 shares. Negative gamma of -2,500 per dollar times a $2 rise lowers delta by 5,000 from zero, so buying 5,000 shares returns the portfolio to delta-neutral, which means buying after rises.

  1. ADelta is -5,000; buy 5,000 sharesCorrect
  2. BDelta is +5,000; sell 5,000 shares
  3. CDelta is -2,500; buy 2,500 shares
  4. DDelta is -10,000; buy 10,000 shares

Explanation

Change in delta = gamma x change in price = -2,500 x 2 = -5,000. Starting from zero, the new delta is -5,000, so buy 5,000 shares to neutralize. Using +5,000 ignores negative gamma; -2,500 ignores the $2 size of the move.

Did you get it right without looking?

One question tells you little. A timed set on Option Sensitivity Measures: The "Greeks" shows your real accuracy, how long you take and where you lose marks.

Practise Option Sensitivity Measures: The "Greeks"Free diagnostic mock

More Option Sensitivity Measures: The "Greeks" questions