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FRM Part I · FRM Exam Part I · Option Sensitivity Measures: The "Greeks"

A trader holds a long position in a European call option on a non-dividend-paying stock. Holding all else constant, which statement about the option's vega is correct?

Vega is positive for long calls and long puts alike. Higher volatility raises option value since the downside is limited to the premium. Put-call parity implies call and put vegas are identical for the same strike and maturity, and at-the-money options have the highest vega.

  1. AVega is positive for a long call and is also positive for a long put with the same strike and maturityCorrect
  2. BVega is positive for a long call but negative for a long put with the same strike and maturity
  3. CVega is negative for a long call because higher volatility raises the chance of losses
  4. DVega is zero for at-the-money options because the delta is 0.5

Explanation

Higher volatility increases the chance of large favorable payoffs while losses are capped at the premium, so both long calls and long puts gain value. Put-call parity shows call and put vegas are equal for the same strike and maturity, because the difference between them does not depend on volatility. At-the-money options have the largest vega, not zero.

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