Greeks calculation

[Peter van Vliet]

David,
Basis yr experience, do you think it is likely we will to calculate any of the greeks on the exam, rho, gamma etc. I.e. Calculate d1 and then use the various formulas?

 

[David Harper CFA FRM]

Hi Peter,

No, I seriously doubt you will be asked to calculate those non-delta Greeks. Delta? maybe

I am glad you asked, selfishly, because we have a conf call with GARP on Monday. For that, I have listed some AIMs to highlight as problematic.
Every year I am asked about this AIM (you are the third to ask this year, and understandably as the AIM reads):

Define, compute [sic] and describe theta, gamma, vega, and rho for option positions

I can't imagine the "compute" belongs here, sincerely; rho is the only manageable calc.
GARP has never tested the computation of any of the three, to my knowledge (of course, behavior of these greeks, use in hedging, are common questions but that's different ...)

I do definitely think you should be familiar with delta; i.e., N(d1) and N(d1)-1... but i would not be spending time on memorizing the formulas for these four Greeks (but, that's just my opinion, contrary to the AIM, based on the fact that these computations to my knowledge have never been asked). Thanks, David

 

[Peter van Vliet]

That helps a lot david..bit let to memorize.

 

[David Harper CFA FRM]

Sure,

Just to clarify/emphasize, delta is not in that AIM list, delta is uniquely important. I just looked the FRM handbook questions on option Greeks (caveat: hardly a large sample): there are many questions about delta, not so much calcs but there is a calc for the delta of a forward, so my summary advice is:

• Know delta very well (historically highly tested). It would be good to know the formulas.
• For the other Greeks (theta, gamma, vega, rho), the formulas are not worth your time, but you definitely do need to grasp them qualitatively (e.g., where do they tend to peak; why is % gamma always positive) and you should be able to "neutralize" a portfolio with these Greek features