FRM Part I · FRM Exam Part I · Option Sensitivity Measures: The "Greeks"
A European call has a vega of 0.20 per one percentage point change in volatility (that is, the price changes by 0.20 for each 1% change in volatility). The option is currently priced at 5.00 with implied volatility of 25%. Using vega alone, what is the approximate option price if implied volatility rises to 28%?
The approximate new price is 5.60. Vega of 0.20 per percentage point times a 3-point rise in implied volatility adds 0.60 to the current 5.00 price. This is a first-order approximation that ignores higher-order effects.
- A5.60Correct
- B5.20
- C5.75
- D6.40
Explanation
The volatility change is 3 percentage points. Price change = 0.20 × 3 = 0.60. New price ≈ 5.00 + 0.60 = 5.60. Choosing 5.20 uses only one point of change; 6.40 misapplies vega by multiplying by 7 or similar.
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