Question

The price change sensitivities of each of the variables in the BSM equation are known as the "Greeks"

a. true
b. false

Answer 1

The statement is **true**.

In the context of the Black-Scholes-Merton (BSM) option pricing model, the price change sensitivities of the variables in the equation with respect to various factors are indeed referred to as the "Greeks."

The Greeks are measures used to assess how an option's price is affected by changes in different factors such as underlying asset price, time to expiration, volatility, and interest rates. The commonly known Greek measures include:

1. **Delta (Δ):** Measures the change in the option price concerning changes in the underlying asset price.

2. **Gamma (Γ):** Represents the rate of change of an option's delta concerning changes in the underlying asset price.

3. **Theta (Θ):** Measures the change in the option price over time (time decay) as the expiration date approaches.

4. **Vega (ν):** Represents the sensitivity of the option price to changes in implied volatility.

5. **Rho (ρ):** Measures the sensitivity of an option's price to changes in the interest rate.

These Greeks provide valuable insights into how an option's price might change concerning alterations in these underlying factors. Traders and investors use these measures to assess and manage the risks associated with options and make informed decisions about their positions.

Answer 2

The statement is true; the Greeks refer to the price change sensitivities of the variables in the Black-Scholes-Merton options pricing model.

Step-by-step explanation:

The statement that the price change sensitivities of each of the variables in the BSM equation are known as the "Greeks" is true. The Black-Scholes-Merton (BSM) model is an options pricing model, and the Greeks refer to the different dimensions of risk involved in taking an options position. These include delta, gamma, theta, vega, and rho, among others. While alpha (α) and beta (β) are often associated with statistical tests and hypothesis testing, they are not directly related to the Greeks in the context of the BSM equation.