Chapter 19 The Greek Letters

A financial institution that sells an option to a client in the over-the-counter markets is faced with the problem of managing its risk. If the option happens to be the same as one that is traded on an exchange, the financial institution can neutralize its exposure by buying on the exchange the same option as it has sold. But when the option has been tailored to the needs of a client and does not correspond to the standardized products traded by exchanges, hedging the exposure is far more difficult.

In this chapter we discuss some of the alternative approaches to this problem. We cover what are commonly referred to as the “Greek letters”, or simply the “Greeks”. Each Greek letter measures a different dimension ...

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