Past Paper Question 7

Discussion in 'CT8' started by JohnnySinz, Oct 18, 2016.

  1. JohnnySinz

    JohnnySinz Member

    I was hoping if someone could clarify if the following relationship holds true:

    Vega = S*sqrt(T)*NORM(d1)

    If this is true, we are given values for Vega, S and T.

    If we solve this by making NORM(d1) the subject, which is also the formula for delta, the answer is:

    29/60*sqrt(3) = 0.279 which is different to what we would get if we used the longer formulae for calculating d1 using all the information given in the question.
     
    JohnnySinz, Oct 18, 2016
    #1
  2. Steve Hales

    Steve Hales ActEd Tutor Staff Member

    I can't seem to find which past exam question you're referring to, not that it really matters. You need to be careful about your NORMs. If we're talking about European call options, then:

    Vega=\(S\phi(d_1)\sqrt{T}\)​

    but

    Delta = \(\Phi(d_1)\)​

    Those normal functions aren't the same; \(\phi\) is the density function, and \(\Phi\) is the cumulative distribution function. That might explain your differing answers.
     
    Steve Hales, Oct 18, 2016
    #2
    JohnnySinz likes this.
  3. JohnnySinz

    JohnnySinz Member

    Thanks you that makes perfect sense :)
     
    JohnnySinz, Oct 19, 2016
    #3

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