Calculations of Greeks in The Black and Scholes Formula
Calculations of Greeks in The Black and Scholes Formula
Calculations of Greeks in The Black and Scholes Formula
In the Black and Scholes model the price of an European call option on a non-dividend
paying stock is
(1)
where 8 is the stock's price at valuation date, K is the strike price, r is the (constant) spot
rate, T = T- t, is the time to maturity, T the expiry, i the valuation date and
dt
d2
log s
I<
log .!i
I<
+ (r + la2 )T
a
ft
(2)
+ (r -
l2 a 2 )T
aft
= d1 -
a.;T ,
(3)
fJC
= N(dt) ,
88
8 2C
N' ( dt)
K e- r-r N' (d2)
= 88 2 = 8a.;T =
8 2a.;T
delta:
b.c
gamma:
rc
theta:
= _ K - r-r N(d ) _
E-~7C = fJC
fJL
r e
2
rho:
PC=
c;;: =
11ega:
Vc =
In order to prove the theorem we collect some common calculations in the following
Le mma 1. It holds
or
od2 od1
fJt
fJt
od1 _ od2 =
oa
oa
---
(4)
8a,;T '
V7
a
fJr
2ft '
V7
.
(5)
(6)
(7)
(8)
_ ~e
1_ - x2 /2
y27f
d~-d2
1
1
c
c
s
= (d1 + d2)(d1- rh) = (2d1- ayT)ayT =log K
2
2
2
1 2
+ (r + 21 a 2 )T - 2
a
=log K +rT
and this completes the proof of (4) .
The proofs of the other statements a.re straightforward calculations.
~~ =
by (5)
= N(d1)
by (4).
(9)
rc = _
Ke - rr N'(d2)
S 2ajT
____,_s,__
=--
SaJT
The theta is
8c
oC
ot
by (7)
by (4)
by (4)
2jT
=-K e- rr [r N (d2)
+ a~~2 ) ]
Pc
oC
or
S N'((1,1
.1 ) od1
or
= TK e- rr N(d2)
.
+ T K e- rr N((1,2
+ ~~1
1 )
.1 ) od2
- K e- rr N'((1,2
or
= TK e- rr N(rh)
by (6)
by (4) .
Vc
~: = SN'(dt)~; -Ke-rrN'(d2)~~
by (8)
= ,;7-K e- rr N'(rh)
= ,;7-SN'(dl)
by (4)
D
by (4) .
Consider now a forward contract, with strike K and maturity T, i.e. with payoff at time
T given by F(T) = S(T)- K. Denote by F = F(i) = S(t)- K e- r(T- t) = 8- Ke- rr its
price at time i .
oF .1
deUa:
b.p
= as =
gamma:
rF
= oS2 = 0 ,
theta:
t:)p
'
{:)2p
{:)F
7iL
= -rK e- rr
{:)F
rho:
pp= Or =TKe
vega:
Vp
- rr
oF
= OCT = 0 .
By using the put-call parity relation C- P = F and the previous exercise it is straightforward to compute the Greeks for a put option.
delta:
b.p
= as = - N( -d1) ,
gamma:
rP
8 2P
N'(dl)
Ke- rrN'(rh)
---:-;:,....--=-....::..:..
- 8S 2 - SCTy'T S 2CTy'T
theta:
E-)p
rho:
PP
11ega:
Vp
-- - - - -
0: =
-TKe- rrN(-d2) ,
(In order to better int.erpret the forma?Llae, recall that for every x, N'(x)
= N'( -x)).
Assume now the stock pays dividends at a constant dividend yield 8. We know that the
call option price Black and Scholes formula becomes
(10)
and form?Llae (5), (6), (7) and (8) remain the same in the non-dividend paying case.
rho:
ve,qa:
=8e
or -
K e
rr
Exercise. Using put-call par'ity and the pr'evious re.<;tLlL'i, obtain the Greeks of the put option.