Question #30
Reading: Reading 31 Valuation of Contingent Claims
PDF File: Reading 31 Valuation of Contingent Claims.pdf
Page: 14
Status: Unattempted
Correct Answer: B
Question
When an option's gamma is higher:
Answer Choices:
A. a delta hedge will be more effective
B. delta will be higher
C. a delta hedge will perform more poorly over time
Explanation
Gamma measures the rate of change of delta (a high gamma could mean that delta will be
higher or lower) as the asset price changes and, graphically, is the curvature of the option
price as a function of the stock price. Delta measures the slope of the function at a point.
The greater gamma is (the more delta changes as the asset price changes), the worse a
delta hedge will perform over time.