Paul Kedrosky tells us that:
Infectious Greed: Bluffer's Guide to Foreign Exchange Lingo: The FT has an amusing bluffer's guide to foreign exchange (and options) lingo in a supplement today. Here are some highlights -- the best of which is Vega:
The Greeks. Uniquely, both novices and those who have mastered options can claim "this is all Greek to me," because the Greek alphabet plays an unfeasibly large role. At least this ensures the language is not Spartan.
Delta. A dry start, despite its name, to our ramble through ancient Greece. Delta measures the sensitivity of an option price to changes in the price of the underlying commodity. Also known as the hedge ratio by non-classicists, although that is a prickly subject.
Gamma. It hardly needs spelling out but gamma measures how fast delta changes given a unit change in the underlying asset. Kid's stuff really. A lower gamma makes an option easier to hedge.
Theta. The change in the option premium for a given change in the period to expiry. Also known as time decay. This can be even more painful than tooth decay as the value of your option melts before your eyes.
Vega. Those still paying attention will have spotted this is not a Greek word at all, but an American singer-songwriter. Vega is the change in the price of an option that results from a 1 per cent change in volatility. Higher uncertainty results in a higher premium. Curiously, the options gods have yet to come up with the definition of Luka.
Hmmm... Some of this is quite useful. (Not, however, the lame jokes about folk singers.)
Posted by DeLong at June 4, 2004 04:48 PM
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So when do they start paying Milken franchising fees? Did he not construct the perfect hedge?
Posted by: dd on June 4, 2004 07:03 PMMr. DeLong I have to strongly disagree with you— I thought the Luka reference was hilarious.
Posted by: Tony S. on June 4, 2004 08:12 PMI find myself wondering if, rather than predicting option pricing, Black-Scholes forces option pricing by providing a "proven" expected price.
I fondly remember sitting in a lecture hall, filled with MBA students who were mostly terrified of first deriviatives, while Black-Scholes was being explained. The mood was tense, as most of the students were Finance students, who believed that the secrets of the universe were being revealed and they didn't have the skills to understand it.
Of course, after scaring the math-impared (all of whom had somehow managed to pass Calculus as undergrads) with the details of the formula, the professor then revealed what you really need to know - how to plug in numbers and why variations in inputs like volatility impacted option prices. The sigh of relief was tangible, and I swear that the room smelled like the sweat of fear for the next week. (Or was that the scotch tasting that we had that night?)
Posted by: Larry B on June 4, 2004 08:19 PMHah! My physicist friends and I use that joke all the time: its all Greek to me!
I bet we use a lot more Greek letters, too. A certain Dr. I know just loves to use the variables eta, xi. Man, it gets old trying to write those damn squiggly bastards a thousand times in an involved quantum mechanics problem. I lobby for letters like 'a' and 'b,' but he ignores me.
Posted by: Timothy Klein on June 4, 2004 11:06 PMWhy did they ever stop teaching ancient Greek in schools? I was one of the last kids to have to take it in the mid-1980's, and I only took it for three years, but I'm very glad I did. Anglo-Saxon and European culture, philosophy and science is filled with references to them.
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