Gamma Is a Risk Measure That Is Related to the Volatility

question 31

Multiple Choice

Gamma is a risk measure that is related to the volatility (particularly jump-risk) of the underlying stock. Which of the following is most valid?

• A) When you buy vanilla call options it is useful to hedge away gamma to minimize jump risk.
• B) When you sell vanilla put options it is useful to hedge away gamma to minimize jump risk.
• C) Both (a) and (b).
• D) Neither (a) nor (b).

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Definitions:

Amortizing

The process of gradually writing off the initial cost of an asset over a period, especially in the context of loan repayments or in spreading the cost of intangible assets.

Preferred Method

A favored or recommended approach or technique selected among various alternatives for its effectiveness or efficiency.

Convertible Bond

A type of bond that can be converted into a predetermined amount of the company's equity at certain times during its life, usually at the discretion of the bondholder.

Common Stock

A type of equity security that represents ownership in a corporation, giving holders voting rights and a share in the company's profits.