CHAPTER 5The Basic Greeks: Vega

Vega describes how an option price changes with implied volatility. Loosely put, a vega position of long 100 thousand USD in EUR‐USD, for example, means that if implied volatility rises by 1%, the option trader's PnL is +100 thousand USD.

When discussing vega, the trader must make clear which implied volatility she is calculating the sensitivity with respect to. Most commonly, traders take the derivative with respect to images and instead refer to Black‐Scholes vega. However, even this remains unclear. In later chapters, we will see that in practice images is itself a function of images, images. Therefore, one must ask if the derivative is with respect to images where images corresponds to the option in question, or whether images corresponds to a standard contract, such as the ATM, or if it corresponds ...

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