Vega

The change in an option's value for a change in the volatility of the underlying. Positive for both calls and puts, because higher volatility raises the value of any option.

Where you will meet it

Vega appears in 6 learning outcomes on the CFA syllabus. A few of them:

• Explain sensitivity and scenario risk measures and weigh them against VaR
  CFA Level II · Portfolio Construction

  “Sensitivity measures show how value changes for a small move in one risk factor: beta for equity markets, duration and convexity for interest rates, delta, gamma and vega for options.”

• Explain what each option Greek measures
  CFA Level II · Derivatives and Risk Management

  “Vega, the response to volatility, is positive for both calls and puts.”

• Explain what calendar spreads are used for
  CFA Level III · Derivatives and Risk Management

  “Being net long vega, it also gains if implied volatility rises.”

• Show how exposure measures for equities, fixed income, and options can help gauge and control market risk and volatility risk
  CFA Level II · Portfolio Construction

  “For options, delta is the value change per unit move in the underlying, gamma the change in delta, and vega the value change per point of implied volatility, so ΔV ≈ delta × ΔS + ½ × gamma × (ΔS)² + vega × Δσ.”

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

All terms beginning with V · Glossary