medium · FRM Part 1 Valuation and Risk Models
A portfolio manager is long an American put and wants to know the 'Gamma' from the binomial tree.
How is this calculated in a two-step model?
- It is the second derivative of the risk-neutral probability p with respect to the price.
- Using the change in Deltas between the up and down nodes at t=1 over the change in stock prices.
- Gamma simply cannot be estimated from a binomial tree at all; only Delta is ever available there.
- Gamma is generally treated as constant throughout a binomial tree and is said to simply equal 1 divided by S.
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