All the option/CDS/IRS ... pricing sensitivities (known as greeks) are always defined within a math model. These greeks are by definition theoretical, and not reliably verifiable by market data. It's illogical and misleading to ask the question --

Q1: "if this observable factor moves by 1 bp (i.e. 0.01%) in the market, how much change in this instrument's market quote?"

There are many interdependent factors in a dynamic market. Eg FX options - If IR moves, underlier prices often move. It's impossible to isolate the effect of just one input variable, while holding all other inputs constant.

In fact, to compute a greek you absolutely need a math model. Without a model, you can say instrument valuation will appreciate but not sure by how much.

2 math models can give different answers to Q1.

## Wednesday, July 4, 2012

### greeks(sensitivity) - theoretical not realistic

Labels: finGreek, original_content, z_bold

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