Market Risk Measurement Flashcards

What is the Greeks term 'Delta' used to measure in options risk?

Answer: Sensitivity of option price to changes in the underlying asset price

Delta measures how much an option's price changes for a $1 move in the underlying asset, ranging from 0 to 1 for calls and -1 to 0 for puts.

Which Greek measures the rate of change of Delta with respect to the underlying asset price?

Answer: Gamma

Gamma measures the curvature of the option price–underlying relationship and is highest for at-the-money options near expiry.

What does 'Vega' represent in the context of options risk management?

Answer: Sensitivity to changes in implied volatility

Vega quantifies how much an option's value changes for a 1% change in implied volatility, and is always positive for long option positions.

What is basis risk in the context of market risk hedging?

Answer: The risk that the price difference between the hedge instrument and the underlying exposure changes unexpectedly

Basis risk arises when the hedge does not perfectly offset the exposure because the two instruments do not move in lockstep, leaving a residual risk.

A portfolio has a duration of 5 years and interest rates rise by 100 bps. Approximately how much does the portfolio value change?

Answer: Decreases by 5%

Using the modified duration approximation, ΔP/P ≈ −Duration × Δy, so a 100 bps rise gives −5 × 0.01 = −5% change in value.

What is 'convexity' in fixed income risk management?

Answer: A second-order measure of interest rate sensitivity that accounts for the curvature of the price-yield relationship

Convexity improves the duration approximation by capturing the non-linear price response to large interest rate changes, always benefiting long bond holders.