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CA Final · Advanced Financial Management · Risk Management

A treasury manager notes that his option portfolio has a large positive vega. Which statement correctly describes the portfolio's behaviour?

A portfolio with large positive vega gains value when implied volatility of the underlying rises. Vega measures change in option value for a change in volatility, so positive vega means higher volatility increases option premiums and the portfolio value, independent of its delta.

  1. AIt gains value when the implied volatility of the underlying risesCorrect
  2. BIt loses value when the implied volatility of the underlying rises
  3. CIt gains value only as time to expiry shortens
  4. DIt is unaffected by volatility if delta is zero

Explanation

Vega measures sensitivity of option value to volatility. A positive vega portfolio gains when volatility rises and loses when it falls. Option B reverses the sign. Option C confuses vega with theta. Option D is wrong since zero delta does not remove volatility sensitivity.

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