Continuing on the theme of errata, the CIPM Program recently made a change to one of the Learning Outcome Statements in the Return Measurement study session at the Expert Level. I am happy to see this change made, as I made this suggestion several years ago.
One of the Learning Outcome Statements that has been in the curriculum since it’s introduction has read as follows:
calculate the hedge ratio (delta) of an option and determine whether the option is in-the-money, at-the-money, or out-of-the-money
The portion in bold italics font has been a concern to me for several years, because the formula/mathematics and logic behind option valuations is not covered in the curriculum materials.
The Expert Level errata now contains a revised Learning Outcome Statement:
- Hedge ratio is a function of stock price, term of option contract, expected variance of stock price and the risk-free rate
- If stock price is considerably below strike price (deeply out-of-the-money), hedge ratio approaches zero
- If option is at-the-money (stock price and strike are roughly equal), hedge ratio is .5
- If option is deep in-the-money, hedge ratio approaches 1