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Rate making, also known as ratemaking or pricing, is the process of determining the premium rates that insurance companies charge for their policies. It is a critical function that ensures the insurer's profitability and solvency while providing affordable co...

Coinsurance is a provision commonly found in property insurance policies that encourages policyholders to insure their property to a specified percentage of its value. It involves a sharing of losses between the insurer and the insured if the insured fails to...

Insurance policies often contain provisions that address how losses are shared when multiple policies cover the same risk. These provisions are designed to prevent the insured from profiting from a loss and to ensure that each insurer pays its fair share of t...

Understanding the Basics Imagine you've bought an option contract. This contract gives you the right, but not the obligation, to buy (call option) or sell (put option) an asset at a specific price (strike price) by a certain date (expiration date). The price o...

1. Delta (Δ) – Measures Price Sensitivity What it tells you: Delta shows how much the option price changes when the underlying asset (stock or currency) moves by ₹1. It ranges from 0 to 1 for calls and -1 to 0 for puts. Stock Options (Without Dividends) Ca...

Summary of Correct Formulas: Delta (Δ): Measures sensitivity to price changes. Theta (Θ): Measures time decay. Gamma (Γ): Measures the rate of change in Delta. Vega (ν): Measures sensitivity to volatility. Rho (ρ): Measures sensitivity to inte...

The Greeks aren't independent; they dance together! Understanding their relationships is key to managing your option risks effectively. Think of them as interconnected parts of an engine, each influencing the others. 1. Delta (Δ) and Gamma (Γ): The Dynamic Du...

Managing Your Option Risks Delta hedging and Gamma hedging are strategies to reduce the risk of your option positions by creating offsetting positions in the underlying asset (usually the stock). A. Delta Hedging: Staying Neutral to Small Price Changes What ...

Let's work through a complete numerical example for each Greek (Delta, Theta, Gamma, Vega, and Rho) for both a stock option (no dividend) and a currency option using the formulas. Scenario: Stock Option (No Dividend): Stock Price (S) = ₹100 Strike Price (K...

The Art of Balance Creating a Delta-neutral portfolio is like balancing a seesaw. You want to position your assets so that the portfolio's value remains relatively unchanged when the underlying asset's price makes small movements. It's a core strategy for opti...

Shielding Your Portfolio from Delta's Mood Swings Gamma neutrality takes risk management a step further than delta neutrality. While delta hedging protects against small price changes, gamma hedging aims to protect against changes in delta itself. In essence, ...

A Specific Portfolio Configuration A "Delta Positive, Gamma Neutral" portfolio is a specific type of options strategy that combines a directional bias (positive delta) with a desire to limit sensitivity to changes in that directional exposure (gamma neutral). ...

Profiting from Big Swings, Regardless of Direction A "Gamma Positive, Delta Neutral" portfolio is designed to profit from significant price movements in the underlying asset, regardless of whether the price goes up or down. It's a strategy for volatility tradi...

Exchanging Cash Flows A swap is a derivative contract where two parties agree to exchange cash flows based on different financial instruments. Think of it as two companies agreeing to trade payment streams based on interest rates, currencies, or other assets. ...

Insurance Against Default A Credit Default Swap (CDS) is essentially an insurance policy against the risk of a company or sovereign entity (the reference entity) defaulting on its debt. One party (the protection buyer) pays a premium to another party (the prot...

Extending the CDS Toolkit While a standard Credit Default Swap (CDS) provides ongoing protection against default in exchange for a premium, CDS Forwards and CDS Options offer more flexibility in managing credit risk and expressing specific views on creditworth...

Futures, Caps, Floors, and FRAs This topic covers several instruments used to manage interest rate risk. A. Interest Rate Futures: What it is: A futures contract where the underlying asset is an interest-bearing instrument (e.g., a Treasury bill, a Eurodolla...

Nonstandard American Options: What it is: American options grant the holder the right to exercise the option at any time before the expiration date. Nonstandard American options modify the standard American option in some way, typically by adding restriction...

Tailoring the Payout Structure These exotic options alter the standard call or put option payoff structure in unique ways, offering specific risk-reward profiles. Gap Options: What it is: A gap option is a call or put option where the strike price that de...

The Journey Matters These exotic options have payoffs that depend not only on the underlying asset's price at expiration, but also on the path the price takes over the option's life. This path dependency adds complexity to their valuation and risk management. ...