Delta Hedging and Greeks

Study Guide + EXCEL Value Pack

This course is based on a four part executive MBA course on derivative pricing and risk management that Jawwad taught in Dubai and Singapore at the SP Jain School of Management.

It includes one PDF study guide with six Excel files. Themes covered understanding the difference between N(d1) and N(d2), the Black Scholes model, Greeks (Delta, Gamma, Vega, Theta and Rho), Hedging higher order Greeks using Solver, Volatility Surfaces, Delta Hedging and P&L distributions for a vanilla call and put options.

The value pack includes the content of the Hedging higher order Greeks and Delta Hedging study guides.

Primary lessons have been compressed into short bite sized pieces. There are some equations, but much time is not spent on them or their derivations. Ground rules, behaviour and intuition however are discussed. For instance, a trader is more likely to ask you about how Gamma is going to behave under a given scenario and how that is different from Vega’s reaction rather than ask for the formula. He or she is more interested in how you think, your ability to grasp a concept and your intuition than your memory.

The methodology followed, therefore, is to present EXCEL models with the text – read the chapter, dissect the model, load up on intuition. Repeat. Deriving numbers and plotting graphs ensures that the intuition behind how Greeks work is retained.

This study guide walks through option price sensitivities and Greeks behaviour and plots the same in EXCEL. It presents a dynamic Delta hedging simulation and uses a Cash P&L simulation to dissect the minor Greeks.

The course includes 6 EXCEL files that demonstrate the calculation of Greeks and Delta Hedging for European call & put options.

The “Greeks” EXCEL file contains the:

  • Calculation of the Black Scholes option price for a European Call and a European Put option
  • Calculation of Greeks- Delta, Gamma, Vega, Theta & Rho- for a European Call and a European Put option
  • Data table that captures the Black Scholes risk adjusted probabilities and option premium across a series of volatilities
  • Graphical representation of Black Scholes risk adjusted probabilities and option premium against volatilities
  • Data tables that capture the sensitivity of the Greeks against Spot, Strike, Time to maturity, Volatility and the Risk Free Rate respectively
  • Graphical representation of the sensitivities of the various Greeks against Spot, Strike, Time to maturity, volatility and risk free rate respectively

The “Delta Hedging – Call Option” EXCEL file presents the:

  • Calculation of a 12-step Monte Carlo simulat