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Derivatives


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Absolute Delta


The dollar sensitivity of the price of a derivative to a dollar change in the price of the underlying. It is absolute in the sense that it relates the full or absolute change in the value of the underlying to the dollar change in the value of the derivative. For example, if the value (price) of the underlying stock has increased by 10 currency units (dollar change) while the price of the respective derivative contract has moved up by 2 currency unit, then absolute delta for this derivative is:

Absolute delta = $Δ in derivative’s value/ full $Δ underlying’s value

Absolute delta = 2/ 10 = 0.20

This means that for every 1 dollar change in the price of the underlying stock, the value of the derivative changes by 20 cents.

The above example involves unit-based (i.e., it captures the change per unit of value, rather than per contract).


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