Past Paper Question 7

[JohnnySinz]

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.

 

[Steve Hales]

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.

 

[JohnnySinz]

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.

Thanks you that makes perfect sense