When an option’s gamma is higher:
A. delta will be lower.
B. delta will be higher.
C. a delta hedge will be more effective.
D. a delta hedge will perform more poorly over time.
Answer:D
Gamma measures the rate of change of delta (a high gamma could mean that delta will be higher or lower) as the asset price changes and, graphically, is the curvature of the option price as a function of the stock price. Delta measures the slope of the function at a point. The greater gamma is (the more delta changes as the asset price changes), the worse a delta hedge will perform over time.