Extending the Software Framework

This chapter is an application of the methods and C++ code from preceding chapters of this book. In particular, it explains how to estimate delta and gamma, which are the first and second derivatives of the option price with respect to the stock, respectively. These are used for hedging. This is the reduction of risk by exploiting relationships between various risky investments. Delta hedging involves the perfect elimination of all risk by defining a hedge between an option and its underlying. Gamma hedging is used to reduce the size of each hedge which then results in a cost reduction. It is a more accurate form of hedging than delta hedging. The chapter then discusses methods to compute these quantities. It then gives a discussion of software design patterns that are used to extend and customise the functionality of software systems. The chapter also presents some guidelines on improving these design patterns.