Schema GW, GBM en ITO en schema Greeks

Name Definition Formula

Generalized A Generalized Wiener Process is a dx=adt+ bdz
Wiener continuous time random walk with a With a real constant
constant drift and random jumps at
every point in time.
Generalized - ∆ x=a ×∆ t +b × ε √ ∆ t
Wiener
Brownian Motion A Brownian Motion is a continuous time -
random walk with a constant drift and
random jumps at every point in time.
Generalized Wiener is a Brownian
motion with a constant drift
Geometric A geometric Brownian motion is a dx=a × x dt+b × x dz
Brownian Motion discrete time random walk with a linear
drift.
Geometric - dS=μ × S dt +σ × S dz
Brownian Motion

( )
Geometric - σ
2

Brownian Motion d ln( S)= μ− dt+ σ dz

2
Ito’s Lemma Ito's Lemma states that if we have a dx=a ( x , t ) dt +b ( x , t ) dz
function of a stochastic variable, such as
a financial asset's price, then the change
in that function over a small period of
time can be written as the sum of two
terms: a drift term and a diffusion term.

( )
Ito’s Lemma If we combine Geometric Brownian ∂G ∂G 1 ∂ G
2
∂G
(Stochastic motion with the Generalized Wiener dG= a+ + 2
dt + b dz
∂x ∂t 2 ∂ x ∂x
Differential Process we get the following Stochastic
Equation) Differential Equation:

( )
Ito’s Lemma Combine it again with the Generalized ∂G ∂G 1 ∂ G 2 2
2
∂G
(Stochastic Wiener Process we get: dG= μS+ + σ S dt+ σS dz
∂S ∂ t 2 ∂ S2 ∂S
Differential
Equation)
Name Definition Differential Equation Relation Time to maturity
Delta (∆) Delta is the rate of ∂ f change option priceWhen we have a long time to
=
change of the option ∂ S change stock price maturity the delta is much
price with respect to smoother shaped. The further
the underlying (stock we are from maturity the flatter
price) the curves looks. When the
Time to maturity tends to zero
the delta converges faster to its
intrinsic value and get a sharper
slope. Delta becomes bigger
with a smaller T. For smaller T
the delta of in the money
options increases. For smaller
T the delta of out of the
money decreases.
Gamma (Г) Gamma is the rate of 2
∂ f change delta The same holds for the
change of the delta =
∂ S change stock priceGamma. The slope becomes
2
with respect to the sharper with shorter time to
underlying (stock maturity and so the Gamma
price) becomes smaller with shorter
time to maturity. As the
time to expiration
draws nearer, gamma of
ATM options increases
while gamma of
ITM/OTM options
decreases.
Theta (ϴ) Theta is the rate of ∂ f change option priceThe option value becomes less
=
change of the option ∂t change time worth when it comes closer to
price with respect to the maturity date. So with a
time. Theta is always shorter time to maturity Theta
negative. tends to go to zero with a
sharper slope, but becomes
close to zero with a smoother
line when it is further away
from its maturity date. Short
time to maturity smaller Theta
because it is a negative value.
Vega (V) Vega is the rate of ∂ f change option priceIn relation with time, where its
=
change of the option ∂σ change volatility graph is shaped like a normal
price with respect to distribution graph. The longer
its volatility. the time to maturity the higher
the Vega values. The Vega value
is at highest if the option is At
the money.
Rho Rho is the rate of ∂ f change option priceThe longer the time to maturity
=
change of the option ∂r change interest the higher the rho.
with respect to the
interest rate
Delta graph

Gamma Graph
Theta graph
Graph Vega
Graph Rho