What is the definition of Gamma in risk management?

Gamma is a key concept in risk management, particularly in the context of options trading. It measures the rate of change of Delta with respect to changes in the underlying asset's price. Delta itself represents the sensitivity of an option's price to a change in the price of the underlying asset.

When we consider Gamma, it essentially tells us how much Delta will change if there is a small change in the asset price. A higher Gamma value indicates that Delta is more sensitive to changes in the underlying price, which is particularly important for risk management because it affects how an option's position responds to market movements.

Understanding Gamma helps traders and risk managers anticipate how their positions might behave as market conditions change, allowing for better hedging strategies and risk assessment. Thus, the calculation of Gamma as the change in Delta divided by the change in asset price aligns perfectly with its definition in financial derivatives.

The other options provided do not relate to the concept of Gamma in risk management. True Positive/True and False/All pertain more to statistical measures and classifications rather than financial metrics. The formula involving (Payouts + Expenses)/Premiums relates to insurance or underwriting profitability, rather than options pricing or risk sensitivity measures.