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

Which of the following correctly describes how the vega of a European option on a non-dividend-paying stock varies with moneyness and time to maturity, other things equal?

Vega is greatest for at-the-money options and rises with time to maturity. It depends on the normal density at d1, which peaks near the money, and on the square root of time, so longer-dated options are more sensitive to volatility.

  1. AVega is highest for at-the-money options and increases with time to maturityCorrect
  2. BVega is highest for deep in-the-money options and decreases with time to maturity
  3. CVega is highest for at-the-money options and decreases with time to maturity
  4. DVega is highest for deep out-of-the-money options and increases with time to maturity

Explanation

Vega is S times the normal density at d1 times the square root of T. The density peaks near at-the-money, and the square root of T term makes vega increase with longer maturity. Deep in- or out-of-the-money options have low vega.

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