A Brief History of the FX Market’s Evolution
Foreign Exchange Markets
Predicting FX Movement
Basic FX Instruments
Trading Floor Dynamics
FX Options: An Intuitive Approach
Famous Formulas, Fame and Fortune
Getting to the Formula and the Correct Probability Distribution
The Greeks – A Practical Approach
Portfolio Management and Second-order Greeks
FX Options Trading Book & Risk Measurement
Hedging FX Risk at Corporations
You Have Options
Situations Gone Mad, From the Most Complex to the Simplest
Speculators and Hedge Funds: How Do Portfolio Managers Make Money?
Speculating and Hedging: The Fundamental Differences
Time to dive deep again, and put a more definitive structure around the way in which the premium changes as different market parameters move. We briefly discussed the first derivative of the option price with respect to movements in the forward.
The change in the option premium divided by the corresponding change in the forward rate is called the delta (δ, lowercase, or Δ for capital) and indicated by N(d1). It is also the slope of the option price when plotted as a function of the forward rate. The second derivative is called gamma (γ, Γ), and it is also the change in the slope of the option price when plotted against the forward rate, then the change in option price with respect to one interest rate is rho (ρ, P) and with respect to the other rate is phi (ϕ, Θ). Got that?
Don’t worry, we will review what is important gradually, starting with why these derivatives are called “the greeks”. It is just that Greek letters are used to represent these derivatives. Therefore, when speaking about the derivatives we will use lowercase, “g” for greeks. Having said that, one of the most important derivatives is the change in option