Abstract
L ike any other financial asset, the price of an option is sensitive to various risks. From the Merton (1973) model, there are six inputs affecting option prices. These are the stock price, S; the strike price, K ; the risk-free rate, r ; the continuous dividend yield, q ; time to expiration, T ; and the volatility of the stock, σ . This chapter examines option price sensitivities to these inputs and how to hedge these risks. These sensitivities are sometimes called the Greeks. The Merton model derives the value of a put and a call on a stock as
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