Questions / Quant trading, Options & hedging
The gamma correction
An option has delta 0.5 and gamma 0.1. Ignoring time and volatility changes, approximate its price change for a +2 move in the underlying using delta and gamma.
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Answer: 1.2 price units (6/5)
- The second-order approximation is 0.5 × 2 + 0.5 × 0.1 × 2² = 1.2.
Interview shortcut. Second-order Taylor: Δ·dS + ½Γ·dS² = 1 + 0.2.
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