Regarding the option Greeks

[surajthepair]

Dear David/Suzanne,

This has particular reference to the Exotic Options chapter for Level 2. In your practice questions for 2010 Question 25, I find a question on Option Greeks on Barrier Options.
My problem is I understand the definition of the Greeks (delta, Gamma etc) but unable to solve the questions on them. How should I go about them. Also is there any book that I can refer.
Please help me out.

Raj

 

[David Harper CFA FRM]

Hi Raj,

The source is Hull itself (6th or 7th edition) and, really, there is no better book. From an exam perspective, while it is tempting to refer to other books (because there are many of them), i generally would not do that because you can easily stray into untestable content. If you really want, the best supplement in my opinion is McDonald Derivative Markets 2nd edition (i.e., already assigned for commodity curves). It has very high overlap with Hull and I used the overlap myself to reinforce my own understanding ...

However, please keep in mind that my questions tend to be a notch harder than the exam (deliberately, this "stretch question" method has frankly been a successful for our customers) ... this question asks about Greeks with respect to a barrier option. That is a difficult question that, really, is more to help reinforce separately the issue of Greeks and barriers as an exotic. The vast majority of FRM candidates will not master the combination. So, i hope you can view the difficulty as helpful training, not to necessarily expect you can master all of the questions. For the exam, the odds of getting a query on greeks-in-barrier are less than a query on Greeks or barrier.

I hope that helps,
David