Greeks – the link back to the vanilla world
As we explained in the introductory part of this chapter, Greeks are partial derivatives. Some important Greeks are as follows:
- delta: This denotes the DvalueDspot, which is the change of the option price with respect to the change of the underlying spot price
- gamma: This denotes the DdeltaDspot
- vega: This denotes the DvalueDvolatility
- theta: This denotes the DvalueDtime
- rho: This denotes the DvalueDinterest rate
In some simple cases, these partial derivatives can be found analytically. For example, the fOptions package includes the GBSGreeks function that gives the Greeks for vanillas.
Analytical Greeks are convenient; however, there are two problems with them. The first problem is that market-traded parameters ...
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