Revised 12/21/2008

Chapter 30
Derivations and Applications of Greek Letters Review and
Integration
By
Hong-Yi Chen, Rutgers University, USA
Cheng-Few ee, Rutgers University, USA
!ei"#ng Shih, Rutgers University, USA
Abstract
$n this %h#&ter, we introdu%e the de'initions o' (ree" )etters* !e #)so &rovide the
deriv#tions o' (ree" )etters 'or %#)) #nd &ut o&tions on +oth dividends-&#ying sto%" #nd
non-dividends sto%"* ,hen we dis%uss so-e #&&)i%#tions o' (ree" )etters* Fin#))y, we
show the re)#tionshi& +etween (ree" )etters, one o' the e.#-&)es %#n +e seen 'ro- the
B)#%"-S%ho)es &#rti#) di''erenti#) e/u#tion*
Ke words
(ree" )etters, 0e)t#, ,het#, (#--#, 1eg#, Rho, B)#%"-S%ho)es o&tion &ri%ing -ode),
B)#%"-S%ho)es &#rti#) di''erenti#) e/u#tion
30!" Introd#ction
2(ree" )etters3 #re de'ined #s the sensitivities o' the o&tion &ri%e to # sing)e-unit %h#nge
in the v#)ue o' either # st#te v#ri#+)e or # &#r#-eter* Su%h sensitivities %#n re&resent the
di''erent di-ensions to the ris" in #n o&tion* Fin#n%i#) institutions who se)) o&tion to their
%)ients %#n -#n#ge their ris" +y (ree" )etters #n#)ysis*
$n this %h#&ter, we wi)) dis%uss the de'initions #nd deriv#tions o' (ree" )etters* !e #)so
s&e%i'i%#))y derive (ree" )etters 'or %#)) 4&ut5 o&tions on non-dividend sto%" #nd
dividends-&#ying sto%"* So-e e.#-&)es #re &rovided to e.&)#in the #&&)i%#tion o' (ree"
)etters* Fin#))y, we wi)) des%ri+e the re)#tionshi& +etween (ree" )etters #nd the
i-&)i%#tion in de)t# neutr#) &ort'o)io*
30!$ Delta 4 5
,he de)t# o' #n o&tion, , is de'ined #s the r#te o' %h#nge o' the o&tion &ri%e res&e%ted to
1
Revised 12/21/2008
the r#te o' %h#nge o' under)ying #sset &ri%e6
S

where is the o&tion &ri%e #nd S is under)ying #sset &ri%e* !e ne.t show the deriv#tion
o' de)t# 'or v#rious "inds o' sto%" o&tion*
30!$!" Derivation of Delta for Different Kinds of %tock &ptions
Fro- B)#%"-S%ho)es o&tion &ri%ing -ode), we "now the &ri%e o' %#)) o&tion on # non-
dividend sto%" %#n +e written #s6
( ) ( )
2 1
d N Xe d N S C
r
t t

470*15
#nd the &ri%e o' &ut o&tion on # non-dividend sto%" %#n +e written #s6
( ) ( )
r
t 2 t 1
8 9e : d S : d


470*25
where

s
s t
r
X
S
d

,
_

+ +
,
_

2
)n
2
1
2
t s
2 1 s
s
S
)n r
9 2
d d
_ _
+

,
,


t T
( ) N
is the %u-u)#tive density 'un%tion o' nor-#) distri+ution*
( ) ( )

1
2
1
2
1
2
1
d
u
d
du e du u f d N

2
Revised 12/21/2008
First, we %#)%u)#te ( )
( )
2
1
1
1
2
1
2
1
d
e
d
d N
d N

470*75
( )
( )
( )

r t
d
r
X
S
d
d
d
d
d
e
X
S
e
e e e
e e e
e
e
d
d N
d N
s
s t
s
s
s

,
_

+ +
,
_

2
2
2
)n
2
2 2
2
2
2
2
2
2
1
2
2
2
1
2
1
2
1
2
1
2
2
2
1
2
1
2
1
2
1
2
1
470*;5
</* 470*25 #nd </* 470*75 wi)) +e used re&etitive)y in deter-ining 'o))owing (ree" )etters
when the under)ying #sset is # non-dividend &#ying sto%"*
For # <uro&e#n %#)) o&tion on # non-dividend sto%", de)t# %#n +e shown #s
1
:4d 5
470*=5
,he deriv#tion o' </* 470*=5 is in the 'o))owing6

( )
( ) ( )
( )
( ) ( )
( )
( )
( )
2 2
1 1
2 2
1 1
1 2 r t
1 t
t t t
1 2 r 1 2
1 t
1 t 2 t
d d
r r t 2 2
1 t
t s t s
d d
2 2
1 t t
t s t s
1
: d : d C
: d S 9e
S S S
: d : d d d
: d S 9e
d S d S
S 1 1 1 1
: d S e 9e e e
9 2 S 2 S
1 1
: d S e S e
S 2 S 2
: d






+


+

+

+

7
Revised 12/21/2008
For # <uro&e#n &ut o&tion on # non-dividend sto%", de)t# %#n +e shown #s

1
:4d 5 1
470*>5
,he deriv#tion o' </* 470*>5 is

( )
( )
( )
( )
( )
( )
( )
( )
( )
2 2
1 1
2 2
1 1
2 1 r t
1 t
t t t
2 1 r 2 1
1 t
2 t 1 t
d d
r r t 2 2
1 t
t s t s
d d
2 2
t 1 t
t s t s
1
: d : d 8
9e : d S
S S S
41 : d 5 41 : d 5 d d
9e 41 : d 5 S
d S d S
S 1 1 1 1
9e e e 41 : d 5 S e
9 2 S 2 S
1 1
S e : d 1 S e
S 2 S 2
: d 1











+

+


$' the under)ying #sset is # dividend-&#ying sto%" &roviding # dividend yie)d #t r#te /,
B)#%"-S%ho)es 'or-u)#s 'or the &ri%es o' # <uro&e#n %#)) o&tion on # dividend-&#ying
sto%" #nd # <uro&e#n &ut o&tion on # dividend-&#ying sto%" #re
( ) ( )
/ r
t t 1 2
C S e : d 9e : d


470*?5
#nd
( ) ( )
r /
t 2 t 1
8 9e : d S e : d


470*85
where

2
t s
1
s
S
)n r /
9 2
d
_ _
+ +

,
,

;
Revised 12/21/2008

2
t s
2 1 s
s
S
)n r /
9 2
d d
_ _
+

,
,


,o -#"e the 'o))owing deriv#tions -ore e#si)y, we %#)%u)#te </* 470*@5 #nd </* 470*105 in
#dv#n%e*

( )
2
1
1
2
1
1
1
: 4d 5
2
d
N d
e
d

470*@5

( )
( )
2
2
2
1 s
2 2
s 1
1 s
2
2 2
t s
s 1
2
1
2
2
2
d
2
d
2
d
d
2 2
S
d
)n r /
9 2
2 2
d
4r /5 t 2
: d
: 4d 5
d
1
e
2
1
e
2
1
e e e
2
1
e e e
2
S 1
e e
9 2

_ _

+ +


,
,

470*105
For # <uro&e#n %#)) o&tion on # dividend-&#ying sto%", de)t# %#n +e shown #s
/
1
e :4d 5

470*115
,he deriv#tion o' 470*115 is
=
Revised 12/21/2008
( )
( ) ( )
( )
( ) ( )
( )
( )
2 2
1 1
2
1
1 2 / / r t
1 t
t t t
1 2 / / r 1 2
1 t
1 t 2 t
d d
/ / r 4r /5 t 2 2
1 t
t s t s
d
/ / /
2
1 t t
t s t s
: d : d C
e : d S e 9e
S S S
: d : d d d
e : d S e 9e
d S d S
S 1 1 1 1
e : d S e e 9e e e
9 2 S 2 S
1 1
e : d S e e S e e
S 2 S 2

+


+

+

+

( )
2
1
d
2
/
1
e : d

For # <uro&e#n %#)) o&tion on # dividend-&#ying sto%", de)t# %#n +e shown #s

[ ]
/
1
e :4d 5 1


470*125
,he deriv#tion o' 470*125 is
( )
( )
( )
( )
( )
( )
( )
2 2
1 1
2
1
2 1 r / / t
1 t
t t t
2 1 r / / 2 1
1 t
2 t 1 t
d d
r 4r /5 / / t 2 2
1 t
t s t s
d
/
2
t
t s
: d : d 8
9e e : d S e
S S S
41 : d 5 41 : d 5 d d
9e e 41 : d 5 S e
d S d S
S 1 1 1 1
9e e e e 41 : d 5 S e e
9 2 S 2 S
1
S e e e
S 2

+

+

( )
( )
2
1
d
/ /
2
1 t
t s
/
1
1
4: d 15 S e e
S 2
e 4: d 15

+


30!$!$ Application of Delta
Figure 70*1 shows the re)#tionshi& +etween the &ri%e o' # %#)) o&tion #nd the &ri%e o' its
under)ying #sset* ,he de)t# o' this %#)) o&tion is the s)o&e o' the )ine #t the &oint o' A
%orres&onding to %urrent &ri%e o' the under)ying #sset*
>
Revised 12/21/2008
Figure 70*1
By %#)%u)#ting de)t# r#tio, # 'in#n%i#) institution th#t se))s o&tion to # %)ient %#n -#"e #
de)t# neutr#) &osition to hedge the ris" o' %h#nges o' the under)ying #sset &ri%e* Su&&ose
th#t the %urrent sto%" &ri%e is A100, the %#)) o&tion &ri%e on sto%" is A10, #nd the %urrent
de)t# o' the %#)) o&tion is 0*;* A 'in#n%i#) institution so)d 10 %#)) o&tion to its %)ient, so
th#t the %)ient h#s right to +uy 1,000 sh#res #t ti-e to -#turity* ,o %onstru%t # de)t# hedge
&osition, the 'in#n%i#) institution shou)d +uy 0*; . 1,000 B ;00 sh#res o' sto%"* $' the
sto%" &ri%e goes u& to A1, the o&tion &ri%e wi)) go u& +y A0*;* $n this situ#tion, the
'in#n%i#) institution h#s # A;00 4A1 . ;00 sh#res5 g#in in its sto%" &osition, #nd # A;00
4A0*; . 1,000 sh#res5 )oss in its o&tion &osition* ,he tot#) &#yo'' o' the 'in#n%i#)
institution is Cero* Dn the other h#nd, i' the sto%" &ri%e goes down +y A1, the o&tion &ri%e
wi)) go down +y A0*;* ,he tot#) &#yo'' o' the 'in#n%i#) institution is #)so Cero*
However, the re)#tionshi& +etween o&tion &ri%e #nd sto%" &ri%e is not )ine#r, so de)t#
%h#nges over di''erent sto%" &ri%e* $' #n investor w#nts to re-#in his &ort'o)io in de)t#
neutr#), he shou)d #dEust his hedged r#tio &eriodi%#))y* ,he -ore 're/uent)y #dEust-ent he
does, the +etter de)t#-hedging he gets*
Figure 70*2 e.hi+its the %h#nge in de)t# #''e%ts the de)t#-hedges* $' the under)ying sto%"
h#s # &ri%e e/u#) to A20, then the investor who uses on)y de)t# #s ris" -e#sure wi))
%onsider th#t his &ort'o)io h#s no ris"* However, #s the under)ying sto%" &ri%es %h#nges,
either u& or down, the de)t# %h#nges #s we)) #nd thus he wi)) h#ve to use di''erent de)t#
hedging* 0e)t# -e#sure %#n +e %o-+ined with other ris" -e#sures to yie)d +etter ris"
-e#sure-ent* !e wi)) dis%uss it 'urther in the 'o))owing se%tions*
?
Revised 12/21/2008

Figure 70*2
30!3 'heta 4 5
,he thet# o' #n o&tion, , is de'ined #s the r#te o' %h#nge o' the o&tion &ri%e res&e%ted to
the &#ss#ge o' ti-e6
t

where is the o&tion &ri%e #nd t is the &#ss#ge o' ti-e*

$' , t , thet# 4 5 %#n #)so +e de'ined #s -inus one ti-ing the r#te o' %h#nge o' the
o&tion &ri%e res&e%ted to ti-e to -#turity* ,he deriv#tion o' su%h tr#ns'or-#tion is e#sy
#nd str#ight 'orw#rd6
4 15
t t



where , t is ti-e to -#turity* For the deriv#tion o' thet# 'or v#rious "inds o' sto%"
o&tion, we use the de'inition o' neg#tive di''erenti#) on ti-e to -#turity*
30!3!" Derivation of 'heta for Different Kinds of %tock &ption
8
Revised 12/21/2008
For # <uro&e#n %#)) o&tion on # non-dividend sto%", thet# %#n +e written #s6

r t s
1 2
S
: 4d 5 r9 e :4d 5
2

470*175
,he deriv#tion o' 470*175 is
( )
2
1
2
1
r r t 1 2
t 2
r r 1 1 2 2
t 2
1 2
2 2
t
s s
d
r
2
t 2 7
2
s s
s
d
r r t 2
C :4d 5 :4d 5
S r 9 e :4d 5 9e
:4d 5 d :4d 5 d
S r9 e :4d 5 9e
d d
s
)n
r r
1 9
2 2
S e r9 e :4d 5
2 2
2
S 1
9e e e
9 2

+ +


+

_ _

+ +
,





,
+

2
1
2
1
2
t
s
7
2
s s
s
2 2
t
s s
d
r
2
t 2 7
2
s s
s
2
t
s
d
2
t 7
2
s s
s
d
t
s
)n
r
r 9
2
2
2
s
)n
r r
1 9
2 2
S e r9 e :4d 5
2 2
2
s
)n
r
1 r 9
2
S e
2 2
2
1
S e
2

_ _

+
_
,





,

,
_ _

+ +
,





,
_ _

+
,

+



,

2
1
2
s
r
2
2
s
r t s
1 2
2
r9 e :4d 5
S
: 4d 5 r9 e :4d 5
2


_





,

For # <uro&e#n &ut o&tion on # non-dividend sto%", thet# %#n +e shown #s

r t s
1 2
S
: 4d 5 r9 e :4 d 5
2

470*1;5
@
Revised 12/21/2008
,he deriv#tion o' 470*1;5 is
( )
2
1
r r t 2 1
2 t
r r 2 2 1 1
2 t
2 1
2
t
s
d
r r r t 2
2 7
2
s
s
8 :4 d 5 :4 d 5
r 9 e :4 d 5 9e S
41 :4d 55 d 41 :4d 55 d
4 r59 e 41 :4d 55 9e S
d d
s
)n
r
S 1 r 9
4 r59 e 41 :4d 55 9e e e
9 2
2

+


+

_

+
_
,
+



,
2
1
2
1
2
1
s
2 2
t
s s
d
2
t 7
2
s s
s
2
t
s
d
r
2
2 t 7
2
s s
s
2
t
s s
d
2
t 7
2
s
s
2
2
s
)n
r r
1 9
2 2
S e
2 2
2
s
)n
r
1 r 9
2
r9 e 41 :4d 55 S e
2 2
2
s
)n
r r
1 9
2
S e
2
2

_




,
_ _

+ +
,





,
_ _

+
,

+



,
_

+ +
,



2
1
2
s
2
s
d
r
2
2 t
s
r t s
2 1
r t s
2 1
2
2
1
2
r9 e 41 :4d 55 S e
2
S
r9 e 41 :4d 55 : 4d 5
2
S
r9 e :4 d 5 : 4d 5
2

_




,
_





,

For # <uro&e#n %#)) o&tion on # dividend-&#ying sto%", thet# %#n +e shown #s

/
/ r t s
t 1 1 2
S e
/ S e :4d 5 : 4d 5 r9 e :4d 5
2

470*1=5
,he deriv#tion o' 470*1=5 is
10
Revised 12/21/2008
( )
2
1
/ / r r t 1 2
t 1 t 2
/ / r r 1 1 2 2
t 1 t 2
1 2
2
t
s
d
/ /
2
t 1 t 7
2
s
s
C :4d 5 :4d 5
/ S e :4d 5 S e r 9 e :4d 5 9e
:4d 5 d :4d 5 d
/ S e :4d 5 S e r9 e :4d 5 9e
d d
s
)n
r / r /
1 9
2
/ S e :4d 5 S e e
2
2

+ +


+

_

+ +
,



2
1
2
1
2
s
r
2
s
2
t
s
d
r 4r /5 t 2
7
2
s s
s
2 2
t
s s
d
/ /
2
t 1 t 7
2
s s
s
2
r9 e :4d 5
2
s
)n
r /
S 1 r / 9
2
9e e e
9 2 2
2
s
)n
r r
1 9
2 2
/ S e :4d 5 S e e
2 2
2

_





,
_ _

+
_

,

+



,

,
_ _

+ +
,





,
2
1
2
1
r
2
2
t
s
d
/
2
t 7
2
s s
s
2
s
d
/ / r
2
t 1 t 2
s
/
/ r t s
t 1 1 2
r9 e :4d 5
s
)n
r
1 r 9
2
S e e
2 2
2
1
2
/ S e :4d 5 S e e r9 e :4d 5
2
S e
/ S e :4d 5 : 4d 5 r9 e :4d 5
2

_ _

+
,

+



,
_





,

For # <uro&e#n %#)) o&tion on # dividend-&#ying sto%", thet# %#n +e shown #s

/
r / t s
2 t 1 1
S e
r9 e :4 d 5 /S e :4 d 5 : 4d 5
2

470*1>5
,he deriv#tion o' 470*1>5 is
11
Revised 12/21/2008
( )
2
1
r r / / t 2 1
2 t 1 t
r r / / 2 2 1 1
2 t 1 t
2 1
d
r r 4r /5 t 2
2
8 :4 d 5 :4 d 5
r 9 e :4 d 5 9e 4 /5S e :4 d 5 S e
41 :4d 55 d 41 :4d 55 d
r9 e 41 :4d 55 9e /S e :4 d 5 S e
d d
S 1
r9 e 41 :4d 55 9e e e
9 2

+ +


+

2
1
2
1
2
t
s
7
2
s s
s
2 2
t
s s
d
/ /
2
t 1 t 7
2
s s
s
t
d
r /
2
2 t 7
2
s
s
s
)n
r /
r / 9
2
2
2
s
)n
r / r /
1 9
2 2
/S e :4 d 5 S e e
2 2
2
s
)n
1 r / 9
r9 e 41 :4d 55 S e e
2
2

_ _

+
_

,





,

,
_ _

+ +
,





,
_

,
+


2
1
2
1
2
s
s
2 2
t
s s
d
/ /
2
t 1 t 7
2
s s
s
2
s
d
r / /
2
2 t 1 t
s
r /
2 t
r /
2
2
s
)n
r / r /
1 9
2 2
/S e :4 d 5 S e e
2 2
2
1
2
r9 e 41 :4d 55 /S e :4 d 5 S e e
2
r9 e 41 :4d 55 /S e

+



,
_ _

+ +
,





,
_





,

/
t s
1 1
/
r / t s
2 t 1 1
S e
:4 d 5 : 4d 5
2
S e
r9 e :4 d 5 /S e :4 d 5 : 4d 5
2

30!3!$ Application of 'heta 4 5

,he v#)ue o' o&tion is the %o-+in#tion o' ti-e v#)ue #nd sto%" v#)ue* !hen ti-e &#sses,
the ti-e v#)ue o' the o&tion de%re#ses* ,hus, the r#te o' %h#nge o' the o&tion &ri%e with
res&e%tive to the &#ss#ge o' ti-e, thet#, is usu#))y neg#tive*
Be%#use the &#ss#ge o' ti-e on #n o&tion is not un%ert#in, we do not need to -#"e # thet#
hedge &ort'o)io #g#inst the e''e%t o' the &#ss#ge o' ti-e* However, we sti)) reg#rd thet# #s
# use'u) &#r#-eter, +e%#use it is # &ro.y o' g#--# in the de)t# neutr#) &ort'o)io* For the
12
Revised 12/21/2008
s&e%i'i% det#i), we wi)) dis%uss in the 'o))owing se%tions*
30!( Ga))a 4 5
,he g#--# o' #n o&tion, , is de'ined #s the r#te o' %h#nge o' de)t# res&e%ted to the r#te
o' %h#nge o' under)ying #sset &ri%e66
2
2
S S



where is the o&tion &ri%e #nd S is the under)ying #sset &ri%e*
Be%#use the o&tion is not )ine#r)y de&endent on its under)ying #sset, de)t#-neutr#) hedge
str#tegy is use'u) on)y when the -ove-ent o' under)ying #sset &ri%e is s-#))* Dn%e the
under)ying #sset &ri%e -oves wider, g#--#-neutr#) hedge is ne%ess#ry* !e ne.t show the
deriv#tion o' g#--# 'or v#rious "inds o' sto%" o&tion*
30!(!" Derivation of Ga))a for Different Kinds of %tock &ption
For # <uro&e#n %#)) o&tion on # non-dividend sto%", g#--# %#n +e shown #s

( )
1
t s
1
: d
S


470*1?5
,he deriv#tion o' 470*1?5 is

( )
( )
( )
t
2
t t
2
t t
1 1
1 t
t
1
s
1
t s
C
S C
S S
: d d
d S
1
S
: d
1
: d
S
_

,









17
Revised 12/21/2008
For # <uro&e#n &ut o&tion on # non-dividend sto%", g#--# %#n +e shown #s

( )
1
t s
1
: d
S


470*185
,he deriv#tion o' 470*185 is

( )
( )
( )
t
2
t t
2
t t
1 1
1 t
t
1
s
1
t s
8
S 8
S S
4: d 15 d
d S
1
S
: d
1
: d
S
_

,









For # <uro&e#n %#)) o&tion on # dividend-&#ying sto%", g#--# %#n +e shown #s
( )
/
1
t s
e
: d
S



470*1@5
,he deriv#tion o' 470*1@5 is
1;
Revised 12/21/2008

( )
( )
( )
( )
t
2
t t
2
t t
/
1
t
1 / 1
1 t
/ t
1
s
/
1
t s
C
S C
S S
e :4d 5
S
: d d
e
d S
1
S
e : d
e
: d
S




_

For # <uro&e#n %#)) o&tion on # dividend-&#ying sto%", g#--# %#n +e shown #s
( )
/
1
t s
e
: d
S



470*205
,he deriv#tion o' 470*205 is

( ) ( )
( )
( )
( )
t
2
t t
2
t t
/
1
t
1 / 1
1 t
/ t
1
s
/
1
t s
8
S 8
S S
e 4: d 15
S
4: d 15
d
e
d S
1
S
e : d
e
: d
S




_

1

]

1=
Revised 12/21/2008
30!(!$ Application of Ga))a 4 5
Dne %#n use de)t# #nd g#--# together to %#)%u)#te the %h#nges o' the o&tion due to
%h#nges in the under)ying sto%" &ri%e* ,his %h#nge %#n +e #&&ro.i-#ted +y the 'o))owing
re)#tions*

2
1
%h#nge in o&tion v#)ue %h#nge in sto%" &ri%e 4%h#nge in sto%" &ri%e5
2
+
Fro- the #+ove re)#tion, one %#n o+serve th#t the g#--# -#"es the %orre%tion 'or the
'#%t th#t the o&tion v#)ue is not # )ine#r 'un%tion o' under)ying sto%" &ri%e* ,his
#&&ro.i-#tion %o-es 'ro- the ,#y)or series e.&#nsion ne#r the initi#) sto%" &ri%e* $' we
)et 1 +e o&tion v#)ue, S +e sto%" &ri%e, #nd S
0
+e initi#) sto%" &ri%e, then the ,#y)or series
e.&#nsion #round S
0
yie)ds the 'o))owing*


2
2 0 0 0
0 0 0 0 2
2
2 0 0
0 0 0 2
4 5 4 5 4 5 1 1
4 5 4 5 4 5 4 5 4 5
2F 2F
4 5 4 5 1
4 5 4 5 4 5 4 5
2F
n
n
n
V S V S V S
V S V S S S S S S S
S S S
V S V S
V S S S S S o S
S S

+ + + +


+ + +

L
$' we on)y %onsider the 'irst three ter-s, the #&&ro.i-#tion is then,

2
2 0 0
0 0 0 2
2
0 0
4 5 4 5 1
4 5 4 5 4 5 4 5
2F
1
4 5 4 5
2
V S V S
V S V S S S S S
S S
S S S S

+

+
*
For e.#-&)e, i' # &ort'o)io o' o&tions h#s # de)t# e/u#) to A10000 #nd # g#--# e/u#) to
A=000, the %h#nge in the &ort'o)io v#)ue i' the sto%" &ri%e dro& to A7; 'ro- A7= is
#&&ro.i-#te)y,

2
1
%h#nge in &ort'o)io v#)ue 4A100005 4A7; A7=5 4A=0005 4A7; A7=5
2
A?=00
+

,he #+ove #n#)ysis %#n #)so +e #&&)ied to -e#sure the &ri%e sensitivity o' interest r#te
re)#ted #ssets or &ort'o)io to interest r#te %h#nges* Here we introdu%e Modified Duration
#nd Convexity #s ris" -e#sure %orres&onding to the #+ove de)t# #nd g#--#* Godi'ied
dur#tion -e#sures the &er%ent#ge %h#nge in #sset or &ort'o)io v#)ue resu)ting 'ro- #
&er%ent#ge %h#nge in interest r#te*
1>
Revised 12/21/2008

Ch#nge in &ri%e
Godi'ied 0ur#tion 8ri%e
Ch#nge in interest r#te
/ P
_

,

Using the -odi'ied dur#tion,

Ch#nge in 8ort'o)io 1#)ue Ch#nge in interest r#te
4 85 Ch#nge in interest r#te Duration


we %#n %#)%u)#te the v#)ue %h#nges o' the &ort'o)io* ,he #+ove re)#tion %orres&onds to the
&revious dis%ussion o' de)t# -e#sure* !e w#nt to "now how the &ri%e o' the &ort'o)io
%h#nges given # %h#nge in interest r#te* Si-i)#r to de)t#, -odi'ied dur#tion on)y show the
'irst order #&&ro.i-#tion o' the %h#nges in v#)ue* $n order to #%%ount 'or the non)ine#r
re)#tion +etween the interest r#te #nd &ort'o)io v#)ue, we need # se%ond order
#&&ro.i-#tion si-i)#r to the g#--# -e#sure +e'ore, this is then the %onve.ity -e#sure*
Conve.ity is the interest r#te g#--# divided +y &ri%e,

/ 8 Convexity
#nd this -e#sure %#&tures the non)ine#r &#rt o' the &ri%e %h#nges due to interest r#te
%h#nges* Using the -odi'ied dur#tion #nd %onve.ity together #))ow us to deve)o& 'irst #s
we)) #s se%ond order #&&ro.i-#tion o' the &ri%e %h#nges si-i)#r to &revious dis%ussion*

2
Ch#nge in 8ort'o)io 1#)ue 8 4%h#nge in r#te5
1
8 4%h#nge in r#te5
2
Duration
Convexity

+
As # resu)t, 4-dur#tion . 85 #nd 4%onve.ity . 85 #%t )i"e the de)t# #nd g#--# -e#sure
res&e%tive)y in the &revious dis%ussion* ,his shows th#t these (ree"s %#n #)so +e #&&)ied
in -e#suring ris" in interest r#te re)#ted #ssets or &ort'o)io*
:e.t we dis%uss how to -#"e # &ort'o)io g#--# neutr#)* Su&&ose the g#--# o' # de)t#-
neutr#) &ort'o)io is , the g#--# o' the o&tion in this &ort'o)io is
o

, #nd
o

is the
nu-+er o' o&tions #dded to the de)t#-neutr#) &ort'o)io* ,hen, the g#--# o' this new
&ort'o)io is
o o
+
,o -#"e # g#--#-neutr#) &ort'o)io, we shou)d tr#de
H
o o
/ o&tions* Be%#use the
&osition o' o&tion %h#nges, the new &ort'o)io is not in the de)t#-neutr#)* !e shou)d %h#nge
1?
Revised 12/21/2008
the &osition o' the under)ying #sset to -#int#in de)t#-neutr#)*
For e.#-&)e, the de)t# #nd g#--# o' # &#rti%u)#r %#)) o&tion #re 0*? #nd 1*2* A de)t#-
neutr#) &ort'o)io h#s # g#--# o' -2,;00* ,o -#"e # de)t#-neutr#) #nd g#--#-neutr#)
&ort'o)io, we shou)d #dd # )ong &osition o' 2,;00/1*2B2,000 sh#res #nd # short &osition o'
2,000 . 0*?B1,;00 sh#res in the origin#) &ort'o)io*
30!* +ega ,

-
,he veg# o' #n o&tion,

, is de'ined #s the r#te o' %h#nge o' the o&tion &ri%e res&e%ted to
the vo)#ti)ity o' the under)ying #sset6

where is the o&tion &ri%e #nd

is vo)#ti)ity o' the sto%" &ri%e* !e ne.t show the

deriv#tion o' veg# 'or v#rious "inds o' sto%" o&tion*
30!*!" Derivation of +ega for Different Kinds of %tock &ption
For # <uro&e#n %#)) o&tion on # non-dividend sto%", veg# %#n +e shown #s
( )
t 1
S : d 470*215
,he deriv#tion o' 470*215 is

18
Revised 12/21/2008
2
1
2
1
r t 1 2
t
s s s
r 1 1 2 2
t
1 s 2 s
1 2
7
2 t s 2 2
s
d
2
t 2
s
2
t s
d
r r t 2
C :4d 5 :4d 5
S 9e
:4d 5 d :4d 5 d
S 9e
d d
S
)n r
9 2
1
S e
2
S
)n r
9 2
S 1
9e e e
9 2

_ 1 _
+ +

1
, ]





,
1 _
+ +
1
_
, ]

,
( )
2 2
1 1
2
1
1
2
2
s
1 1 2 2
7
2 t s t s 2 2 2
s
d d
2 2
t t 2 2
s s
7
d 2
2
s 2
t 2
s
t 1
S S
)n r )n r
9 2 9 2
1 1
S e S e
2 2
1
S e
2
S : d

,
_ _ 1 1 _ _
+ + + +

1 1
, , ] ]





, ,
_



,

For # <uro&e#n &ut o&tion on # non-dividend sto%", veg# %#n +e shown #s
( )
t 1
S : d 470*225
,he deriv#tion o' 470*225 is
1@
Revised 12/21/2008
2
1
2
1
r t 2 1
t
s s s
r 2 2 1 1
t
2 s 1 s
1 2
t s 2
d
r r t 2
2
s
2
7
2 t s 2
s
d
2
t
8 :4 d 5 :4 d 5
9e S
41 :4d 55 d 41 :4d 55 d
9e S
d d
S
)n r
9 2
S 1
9e e e
9 2
S
)n r
9 2
1
S e
2

_ 1 _
+ +
1
_
, ]




,


,

+ +

2 2
1 1
2
1
1
2
2
s
1 1 2 2
7
2 t s t s 2 2 2
s
d d
2 2
t t 2 2
s s
7
d 2
2
s 2
t 2
s
t
S S
)n r )n r
9 2 9 2
1 1
S e S e
2 2
1
S e
2
S : d

_ 1 _

1
, ]




,
_ _ 1 1 _ _
+ + + +
1 1
, , ] ]
+




, ,
_



,
( )
1
For # <uro&e#n %#)) o&tion on # dividend-&#ying sto%", veg# %#n +e shown #s
( )
/
t 1
S e : d

470*275
,he deriv#tion o' 470*275 is
20
Revised 12/21/2008
2
1
2
1
/ r t 1 2
t
s s s
/ r 1 1 2 2
t
1 s 2 s
1 2
7
2 t s 2 2
s
d
/
2
t 2
s
t
d
r 4r /5 t 2
C :4d 5 :4d 5
S e 9e
:4d 5 d :4d 5 d
S e 9e
d d
S
)n r /
9 2
1
S e e
2
S
)n r
9
S 1
9e e e
9 2

_ 1 _
+ +
1
, ]





,
+
_

,
2 2
1 1
2
1
1 2
s 2
2
s
1 1 2 2
7
2 t s t s 2 2 2
s
d d
/ /
2 2
t t 2 2
s s
7
d 2
2
s 2
t
/
2
S S
)n r / )n r /
9 2 9 2
1 1
S e e S e e
2 2
1
S e
2

_ 1 _
+
1
, ]




,
_ _ 1 1 _ _
+ + + +
1 1
, , ] ]





, ,

( )
2
s
/
t 1
S e : d

_


,

For # <uro&e#n %#)) o&tion on # dividend-&#ying sto%", veg# %#n +e shown #s
( )
/
t 1
S e : d

470*2;5
,he deriv#tion o' 470*2;5 is
21
Revised 12/21/2008
2
1
2
1
r / t 2 1
t
s s s
r / 2 2 1 1
t
2 s 1 s
1 2
t s 2
d
r 4r /5 t 2
2
s
2
s
d
/
2
t
8 :4 d 5 :4 d 5
9e S e
41 :4d 55 d 41 :4d 55 d
9e S e
d d
S
)n r /
9 2
S 1
9e e e
9 2
1
S e e
2

_ 1 _
+ +
1
_
, ]




,


,

+

2 2
1 1
1 2
7
t s 2 2
2
s
1 1 2 2
7
2 t s t s 2 2 2
s
d d
/ /
2 2
t t 2 2
s s
/
t
S
)n r /
9 2
S S
)n r / )n r /
9 2 9 2
1 1
S e e S e e
2 2
S e



_ 1 _
+ +
1
, ]




,
_ _ 1 1 _ _
+ + + +
1 1
, , ] ]
+




, ,

( )
2
1
7
d 2
2
s 2
2
s
/
t 1
1
e
2
S e : d

_



,

30!*!$ Application of +ega ,

-
Su&&ose # de)t#-neutr#) #nd g#--#-neutr#) &ort'o)io h#s # veg# e/u#) to

#nd the veg#

o' # &#rti%u)#r o&tion is
o

* Si-i)#r to g#--#, we %#n #dd # &osition o'

o
/
in o&tion
to -#"e # veg#-neutr#) &ort'o)io* ,o -#int#in de)t#-neutr#), we shou)d %h#nge the
under)ying #sset &osition* However, when we %h#nge the o&tion &osition, the new
&ort'o)io is not g#--#-neutr#)* (ener#))y, # &ort'o)io with one o&tion %#nnot -#int#in its
g#--#-neutr#) #nd veg#-neutr#) #t the s#-e ti-e* $' we w#nt # &ort'o)io to +e +oth
g#--#-neutr#) #nd veg#-neutr#), we shou)d in%)ude #t )e#st two "ind o' o&tion on the
s#-e under)ying #sset in our &ort'o)io*
For e.#-&)e, # de)t#-neutr#) #nd g#--#-neutr#) &ort'o)io %ont#ins o&tion A, o&tion B,
#nd under)ying #sset* ,he g#--# #nd veg# o' this &ort'o)io #re -7,200 #nd -2,=00,
res&e%tive)y* D&tion A h#s # de)t# o' 0*7, g#--# o' 1*2, #nd veg# o' 1*=* D&tion B h#s #
de)t# o' 0*;, g#--# o' 1*> #nd veg# o' 0*8* ,he new &ort'o)io wi)) +e +oth g#--#-neutr#)
#nd veg#-neutr#) when #dding
A

o' o&tion A #nd

B

o' o&tion B into the origin#)

&ort'o)io*
22
Revised 12/21/2008
A B
(#--# :eutr#)6 7200 1*2 1*> 0 + +
A B
1eg# :eutr#)6 2=00 1*= 0*8 0 + +
Fro- two e/u#tions shown #+ove, we %#n get the so)ution th#t
A

.1000 #nd
B

. 12=0!
,he de)t# o' new &ort'o)io is 1000 . *7 I 12=0 . 0*; B 800* ,o -#int#in de)t#-neutr#), we
need to short 800 sh#res o' the under)ying #sset*
30!/ Rho 4

5
,he rho o' #n o&tion is de'ined #s the r#te o' %h#nge o' the o&tion &ri%e res&e%ted to the
interest r#te6
rho
r

where is the o&tion &ri%e #nd r is interest r#te* ,he rho 'or #n ordin#ry sto%" %#))
o&tion shou)d +e &ositive +e%#use higher interest r#te redu%es the &resent v#)ue o' the
stri"e &ri%e whi%h in turn in%re#ses the v#)ue o' the %#)) o&tion* Si-i)#r)y, the rho o' #n
ordin#ry &ut o&tion shou)d +e neg#tive +y the s#-e re#soning* !e ne.t show the
deriv#tion o' rho 'or v#rious "inds o' sto%" o&tion*
30!/!" Derivation of Rho for Different Kinds of stock option
For # <uro&e#n %#)) o&tion on # non-dividend sto%", rho %#n +e shown #s
r
2
rho 9 e :4d 5

470*2=5
,he deriv#tion o' 470*2=5 is
27
Revised 12/21/2008
( )
2 2
1 1
2
1
r r t 1 2
t 2
r r 1 1 2 2
t 2
1 2
d d
r r r t 2 2
t 2
s s
d
2
t
s
C :4d 5 :4d 5
rho S 9 e :4d 5 9e
r r r
:4d 5 d :4d 5 d
S 9 e :4d 5 9e
d r d r
S 1 1
S e 9 e :4d 5 9e e e
9 2 2
1
S e
2

+

_
_ _

+



, ,
,

2
1
d
r
2
2 t
s
r
2
1
9 e :4d 5 S e
2
9 e :4d 5

_ _

+



, ,

For # <uro&e#n &ut o&tion on # non-dividend sto%", rho %#n +e shown #s
r
2
rho 9 e :4 d 5

470*2>5
,he deriv#tion o' 470*2>5 is
( )
2 2
1 1
r r t 2 1
2 t
r r 2 2 1 1
2 t
2 1
d d
r r r t 2 2
2 t
s s
8 :4 d 5 :4 d 5
rho 9 e :4 d 5 9e S
r r r
41 :4d 55 d 41 :4d 55 d
9 e 41 :4d 55 9e S
d r d r
S 1 1
9 e 41 :4d 55 9e e e S e
9 2 2





+


+

_
_ _

+



, ,
,
2 2
1 1
d d
r
2 2
2 t t
s s
r
2
1 1
9 e 41 :4d 55 S e S e
2 2
9 e :4 d 5



_ _

+



, ,

For # <uro&e#n %#)) o&tion on # dividend-&#ying sto%", rho %#n +e shown #s
r
2
rho 9 e :4d 5

470*2?5
,he deriv#tion o' 470*2?5 is
2;
Revised 12/21/2008
( )
2 2
1 1
/ r r t 1 2
t 2
/ r r 1 1 2 2
t 2
1 2
d d
/ r r 4r /5 t 2 2
t 2
s s
t
C :4d 5 :4d 5
rho S e 9 e :4d 5 9e
r r r
:4d 5 d :4d 5 d
S e 9 e :4d 5 9e
d r d r
S 1 1
S e e 9 e :4d 5 9e e e
9 2 2
S e








+

_
_ _

+



, ,
,

2 2
1 1
d d
/ r /
2 2
2 t
s s
r
2
1 1
e 9 e :4d 5 S e e
2 2
9 e :4d 5



_ _

+



, ,

For # <uro&e#n &ut o&tion on # dividend-&#ying sto%", rho %#n +e shown #s
r
2
rho 9 e :4 d 5

470*285
,he deriv#tion o' 470*285 is
( )
2
1
r r / t 2 1
2 t
r r / 2 2 1 1
2 t
2 1
d
r r 4r /5 / t 2
2 t
s
8 :4 d 5 :4 d 5
rho 9 e :4 d 5 9e S e
r r r
41 :4d 55 d 41 :4d 55 d
9 e 41 :4d 55 9e S e
d r d r
S 1 1
9 e 41 :4d 55 9e e e S e e
9 2 2





+


+

_
_

+



,
,
2
1
2 2
1 1
d
2
s
d d
r / /
2 2
2 t t
s s
r
2
1 1
9 e 41 :4d 55 S e e S e e
2 2
9 e :4 d 5



_

,
_ _

+



, ,

30!/!$ Application of Rho ,

-
Assu-e th#t #n investor wou)d )i"e to see how interest r#te %h#nges #''e%t the v#)ue o' #
7--onth <uro&e#n &ut o&tion she ho)ds with the 'o))owing in'or-#tion* ,he %urrent sto%"
&ri%e is A>= #nd the stri"e &ri%e is A=8* ,he interest r#te #nd the vo)#ti)ity o' the sto%" is
=J #nd 70J &er #nnu- res&e%tive)y* ,he rho o' this <uro&e#n &ut %#n +e %#)%u)#ted #s
'o))owing*

2=
Revised 12/21/2008
2
r 40*0=540*2=5
&ut 2
1
)n4>= =85 K0*0= 40*75 L40*2=5
2
Rho 9 e :4d 5 4A=8540*2=5e :4 5 7*1>8
40*75 0*2=

+

,his %#)%u)#tion indi%#tes th#t given 1J %h#nge in%re#se in interest r#te, s#y 'ro- =J to
>J, the v#)ue o' this <uro&e#n %#)) o&tion wi)) de%re#se 0*071>8 40*01 . 7*1>85* ,his
si-&)e e.#-&)e %#n +e 'urther #&&)ied to sto%"s th#t &#y dividends using the deriv#tion
resu)ts shown &revious)y*
30!0 Derivation of %ensitivit for %tock &ptions Respective with 12ercise 3rice
For # <uro&e#n %#)) o&tion on # non-dividend sto%", the sensitivity %#n +e shown #s
r t
2
C
e :4d 5
9

470*2@5
,he deriv#tion o' 470*2@5 is
5 4
2
1
5 4
2
1
1 1
2
1
5 4
1 1
2
1
5 4
5 4
5 4
5 4
5 4
5 4
2
2
2
2
2
2
2
2
2
2
2
1
1
1
2
2
1
2
1
2
1
2
1
2
1
d N e
X
S
e d N e
X
S
e
X
e
X
S
e Xe d N e
X
e S
X
d
d
d N
Xe d N e
X
d
d
d N
S
X
d N
Xe d N e
X
d N
S
X
C
r
t
d
s
r t
d
s
s
r t
d
r r
s
d
t
r r
t
r r
t
t

,
_

,
_

,
_

,
_

,
_

For # <uro&e#n &ut o&tion on # non-dividend sto%", the sensitivity %#n +e shown #s
r t
2
8
e :4 d 5
9

470*705
,he deriv#tion o' 470*705 is
2>
Revised 12/21/2008
2 2
1 1
r r t 2 1
2 t
r r 2 2 1 1
2 t
2 1
d d
r r r t 2 2
2 t
s s
r
2
8 :4 d 5 :4 d 5
e :4 d 5 9e S
9 9 9
41 :4d 55 d 41 :4d 55 d
e 41 :4d 55 9e S
d 9 d 9
S 1 1 1 1 1 1
e 41 :4d 55 9e e e S e
9 9 9 2 2
e 41 :4d






+


+

_
_ _
+


, ,
,

2 2
1 1
d d
t t 2 2
s s
r
2
S S 1 1
55 e e
9 9 2 2
e :4 d 5


_ _
+

, ,

For # <uro&e#n %#)) o&tion on # dividend-&#ying sto%", the sensitivity %#n +e shown #s
r t
2
C
e :4d 5
9

470*715
,he deriv#tion o' 470*715 is
2 2
1 1
2
1
/ r r t 1 2
t 2
/ r r 1 1 2 2
t 2
1 2
d d
/ r r 4r /5 t 2 2
t 2
s s
d
2
s
C :4d 5 :4d 5
S e e :4d 5 9e
9 9 9
:4d 5 d :4d 5 d
S e e :4d 5 9e
d 9 d 9
S 1 1 1 1 1 1
S e e e :4d 5 9e e e
9 9 9 2 2
S 1
e
2

_
_ _



, ,
,


2
1
d / /
r t t 2
2
s
r
2
e S e 1
e :4d 5 e
9 9 2
e :4d 5

_ _



, ,

For # <uro&e#n &ut o&tion on # dividend-&#ying sto%", the sensitivity %#n +e shown #s
r t
2
8
e :4 d 5
9

470*725
,he deriv#tion o' 470*725 is
2?
Revised 12/21/2008
2 2
1 1
r r / t 2 1
2 t
r r / 2 2 1 1
2 t
2 1
d d
r r 4r /5 / t 2 2
2 t
s s
8 :4 d 5 :4 d 5
e :4 d 5 9e S e
9 9 9
41 :4d 55 d 41 :4d 55 d
e 41 :4d 55 9e S e
d 9 d 9
S 1 1 1 1 1 1
e 41 :4d 55 9e e e S e e
9 9 9 2 2





+


+

_
_
+


,
,
2 2
1 1
d d / /
r t t 2 2
2
s s
r
2
S e S e 1 1
e 41 :4d 55 e e
9 9 2 2
e :4 d 5




_

,
_ _
+


, ,

30!4 Relationship between Delta5 'heta5 and Ga))a
So '#r, the dis%ussion h#s introdu%ed the deriv#tion #nd #&&)i%#tion o' e#%h individu#)
(ree"s #nd how they %#n +e #&&)ied in &ort'o)io -#n#ge-ent* $n &r#%ti%e, the inter#%tion
or tr#de-o'' +etween these &#r#-eters is o' %on%ern #s we))* For e.#-&)e, re%#)) the
&#rti#) di''erenti#) e/u#tion 'or the B)#%"-S%ho)es 'or-u)# with non-dividend &#ying
sto%" %#n +e written #s

2
2 2
2
1
2
rS S r
t S S

+ +

!here is the v#)ue o' the deriv#tive se%urity %ontingent on sto%" &ri%e, S is the &ri%e
o' sto%", r is the ris" 'ree r#te, #nd

is the vo)#ti)ity o' the sto%" &ri%e, #nd t is the ti-e

to e.&ir#tion o' the deriv#tive* (iven the e#r)ier deriv#tion, we %#n rewrite the B)#%"-
S%ho)es 80< #s
2 2
1
2
rS S r + +
,his re)#tion gives us the tr#de-o'' +etween de)t#, g#--#, #nd thet#* For e.#-&)e,
su&&ose there #re two de)t# neutr#)
4 05
&ort'o)ios, one with &ositive g#--#
4 05 >
#nd the other one with neg#tive g#--#
4 05 <
#nd they +oth h#ve v#)ue o' A1
4 15
*
,he tr#de-o'' %#n +e written #s
2 2
1
2
S r +
For the 'irst &ort'o)io, i' g#--# is &ositive #nd )#rge, then thet# is neg#tive #nd )#rge*
!hen g#--# is &ositive, %h#nge in sto%" &ri%es resu)t in higher v#)ue o' the o&tion* ,his
28
Revised 12/21/2008
-e#ns th#t when there is no %h#nge in sto%" &ri%es, the v#)ue o' the o&tion de%)ines #s we
#&&ro#%h the e.&ir#tion d#te* As # resu)t, the thet# is neg#tive* Dn the other h#nd, when
g#--# is neg#tive #nd )#rge, %h#nge in sto%" &ri%es resu)t in )ower o&tion v#)ue* ,his
-e#ns th#t when there is no sto%" &ri%e %h#nges, the v#)ue o' the o&tion in%re#ses #s we
#&&ro#%h the e.&ir#tion #nd thet# is &ositive* ,his gives us # tr#de-o'' +etween g#--#
#nd thet# #nd they %#n +e used #s &ro.y 'or e#%h other in # de)t# neutr#) &ort'o)io*
30!6 Concl#sion
$n this %h#&ter we h#ve shown the deriv#tion o' the sensitivities o' the o&tion &ri%e to the
%h#nge in the v#)ue o' st#te v#ri#+)es or &#r#-eters* ,he 'irst (ree" is de)t# 4 5 whi%h is
the r#te o' %h#nge o' o&tion &ri%e to %h#nge in &ri%e o' under)ying #sset* Dn%e the de)t# is
%#)%u)#ted, the ne.t ste& is the r#te o' %h#nge o' de)t# with res&e%t to under)ying #sset
&ri%e whi%h gives us g#--# 4 5* Another two ris" -e#sures #re thet# 4 5 #nd rho 4

5,
they -e#sure the %h#nge in o&tion v#)ue with res&e%t to &#ssing ti-e #nd interest r#te
res&e%tive)y* Fin#))y, one %#n #)so -e#sure the %h#nge in o&tion v#)ue with res&e%t to the
vo)#ti)ity o' the under)ying #sset #nd this gives us the veg# 4
v
5*
,he re)#tionshi& +etween these ris" -e#sures #re shown, one o' the e.#-&)e %#n +e seen
'ro- the B)#%"-S%ho)es &#rti#) di''erenti#) e/u#tion* Further-ore, the #&&)i%#tions o'
these (ree"s )etter in the &ort'o)io -#n#ge-ent h#ve #)so +een dis%ussed* Ris"
-#n#ge-ent is one o' the i-&ort#nt to&i%s in 'in#n%e tod#y, +oth 'or #%#de-i%s #nd
&r#%titioners* (iven the re%ent %redit %risis, one %#n o+serve th#t it is %ru%i#) to &ro&er)y
-e#sure the ris" re)#ted to the ever -ore %o-&)i%#ted 'in#n%i#) #ssets*
References
BEor", ,*, Arbitrage Theory in Continuous Time, D.'ord University 8ress, 1@@8*
Boy)e, 8* 8*, M <-#nue), 0* 41@805* 0is%rete)y #dEusted o&tion hedges* Journa of
!inan"ia #"onomi"s, $475, 2=@-282*
0u''ie, 0*, Dynami" Asset Pri"ing Theory, 8rin%eton University 8ress, 2001*
F#+oCCi, F*N*, !ixed %n"ome Anaysis, 2
nd
<dition, !i)ey, 200?*
2@
Revised 12/21/2008
Fig)ews"i, S* 41@8@5* D&tions #r+itr#ge in i-&er'e%t -#r"ets* Journa of !inan"e, &&4=5,
128@-1711*
(#)#i, 0* 41@875* ,he %o-&onents o' the return 'ro- hedging o&tions #g#inst sto%"s*
Journa of 'usiness, ()415, ;=-=;*
Hu)), N*, *+tions, !utures, and *ther Derivatives >
th
<dition, 8e#rson, 200>*
Hu)), N*, M !hite, A* 41@8?5* Hedging the ris"s 'ro- writing 'oreign %urren%y o&tions*
Journa of %nternationa Money and !inan"e, )425, 171-1=2*
O#r#tC#s, $* #nd Shreve, S*<*, 'ro,nian Motion and Sto"hasti" Ca"uus, S&ringer, 2000*
O)e+#ner, F*C*, %ntrodu"tion to Sto"hasti" Ca"uus ,ith A++i"ations, $-&eri#) Co))ege
8ress, 200=*
G%0on)#d, R**, Derivatives Mar-ets 2
nd
<dition, Addison-!es)ey, 200=*
Shreve, S*<*, Sto"hasti" Ca"uus for !inan"e %%. Continuous Time Mode, S&ringer,
200;*
,u%"-#n, B*, !ixed %n"ome Se"urities. Toos for Today/s Mar-ets, 2
nd
<dition, !i)ey,
2002*
70