Monday, April 17, 2017

black scholes - Why gamma and theta have opposite signs?


I saw some textbooks use B-S equation to explain why gamma and theta have opposite signs in most of the cases. For example, John Hull's classic book.


The explanation is, first write B-S equation in terms of greeks:


Vt+rSVS+12σ2S22VS2=rV


Θ+rSΔ+12σ2S2Γ=rV


Θ+12σ2S2Γ=r(VSΔ)


Do we need to assume r=0, in order to draw the conclusion that gamma and theta have opposite signs?




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