Option question,

I have hit a mental block on a question.

Its the way the question is posed thats causing me the problem.

Which of the following best expresses a relationship similar to DELTA:THEORETICAL PRICE

a. Gamma: Delta
b Vega: Vol
cTheta: Time
d Rho: int rate

My answer is b c d but is that the right answer. I just dont get the question.

 

I would say A. DELTA is the rate of change of the THEORETICAL PRICE with respect to a change in the underlying, and GAMMA is the rate of change of the DELTA with respect to a change in the underlying. So delta is to theoretical price as gamma is to delta.

 

Its the terminology of the question that has got me confused.

Thanks for that, much appreciated.

 

The question would have been better phrased if they simply said "price" rather than "theoretical price." Every product of an option model is theoretical - it's confusing to single out price.