Questions/Answers

Q. Suppose an option pays one if spot stays in range K1 and K2 and zero otherwise.

    What can we say about the Vega? 

 

A.

- double no-touch option.

- negative vega.

- If volatility increases --> probability of hitting K1 or K2 increases --> option price decreases. 

Q. All being equal, which option has higher vega?

    ATM Call with spot = 100 or ATM Call with spot = 200? 

 

A. 

The option with spot 200 will be worth twice as much as the option with spot 100. 

The vega of option B will be twice the vega of option A, as the two will multiply through the vega as well. 

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