Gamma

What it means

The rate at which delta changes as the underlying moves.

The exam angle

Highest at the money and near expiry. High gamma means a delta hedge goes stale quickly and must be rebalanced more often.

Where it appears in the syllabus

• DerivativesCFA Level II · exam weight 5–10% · Forward commitments and contingent claims — binomial, BSM, the Greeks.
• Valuation & Risk ModelsFRM Part I · exam weight 30% · VaR and ES, option valuation, bond risk, stress testing, credit and op risk.
• Market Risk Measurement & ManagementFRM Part II · exam weight 20% · VaR and ES estimation, backtesting, EVT, GARCH, copulas, FRTB.

Related terms

• Implied volatilityThe volatility that, put into an option pricing model, returns the option’s observed market price.
• Black–Scholes–Merton modelA closed-form model for European option prices, assuming lognormal prices, constant volatility and continuous…
• Delta hedgingOffsetting an option position with the underlying so the combined position is insensitive to small price moves.
• RhoThe sensitivity of an option’s value to a change in the risk-free rate.
• ThetaThe change in an option’s value from the passage of one day, all else equal.
• VegaThe change in an option’s value for a one point change in implied volatility.