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.

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  1. Modern Finance

    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:Th…