Vega

The change in an option's value for a one point change in volatility. Long options have positive vega.

Where you will meet it

Vega comes up in 6 learning outcome notes across the FRM syllabus. A few of them:

• Exotic Options
  FRM Part I · Financial markets and products

  “Volatility swap payoff = vega notional × (realised volatility − strike volatility).”

• The Black-Scholes-Merton Model
  FRM Part I · Valuation and risk models

  “Guess a volatility, compare the model price with the market price, and refine the guess until the two match, using bisection, interpolation or Newton-Raphson, which uses vega to size each step.”

• Volatility Smiles and Volatility Surfaces
  FRM Part II · Market risk measurement and management

  “The effective delta is the model delta plus vega times the change in implied volatility per unit change in the asset price.”

• Option Sensitivity Measures: The “Greeks”
  FRM Part I · Valuation and risk models

  “Vega is the sensitivity to volatility and is also the same for calls and puts, and for a stock paying no dividends Vega = S × √T × N'(d1).”

See also

Option · Volatility

All terms beginning with V · FRM glossary

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