Calculations of Greeks in The Black and Scholes Formula

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The document discusses the calculation of Greeks (delta, gamma, theta, rho, vega) in the Black-Scholes model for call options on stocks with and without dividends using formulas.

The Greeks (derivatives of option price with respect to underlying parameters) for calls are derived. Delta is the change in option price for a $1 change in stock price. Gamma is the change in delta for a $1 change in stock price. Theta is the daily time decay. Rho is the change in option price for a 1% change in interest rates. Vega is the change in option price for a 1% change in volatility.

With dividends, the stock price in the Black-Scholes formula is adjusted down by the present value of expected dividends over the life of the option. The formulas for Greeks remain the same except the stock price is replaced by this adjusted stock price. This affects the calculation of d1 and d2.

Calculations of Greeks

in the Black and Scholes Formula


Claudio Pacati

May 15, 2013

N on-div idend pay ing stock

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)

where a is the stock's volatility.

Theorem 1. The greeks for the call option are:

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 =

~: = .;T8N'(dt) = .;TK e- r-r N'(d2)

a8N'(dt) = -K - r-r [ N(d ) a N'(d2) ]


e
r
2 +
2 VT
2 VT

Ke- r-r N(rh) ,

In order to prove the theorem we collect some common calculations in the following

Le mma 1. It holds

8N'(dt)- Ke- r-r N'(d2) = 0 ,


f)dl
orh
88
88
f)dl
orh

or

od2 od1
fJt
fJt
od1 _ od2 =
oa
oa

---

(4)

8a,;T '

V7
a

fJr

2ft '
V7
.

(5)
(6)
(7)
(8)

Proof. First of all, we remember that


N '( x )

_ ~e
1_ - x2 /2
y27f

Statement (4) holds if and only if

Notice that the right hand side of the last condition is

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.

Proof of theorem 1. For the deUa, we have that


b.c =

~~ =

N(d1) + SN'(d1) ~i -K e- rr N'(d2) ~~~

= N(d1) + ~i [SN'(d1 ) - Ke - rr N'(d2)]

by (5)

= N(d1)

by (4).

(9)

Using (9) and (5) the gamma is

= fPC = of:::.c = N'(d ) od1 = N'(di)


1
oS2
oS
oS
SajT

By (4) it can be also written in the form


K e - "'r N'(d2)

rc = _

Ke - rr N'(d2)
S 2ajT

____,_s,__
=--

SaJT

The theta is

8c

SN'(d!) od 1 - r K e- rr N(d2)- K e- rr N'(d2) od2


ot
ot
= - rK e- rr N(d2) + od1 [S N'(d1) - K e- rr N'(d2)] - aK e- rr N'(rh)
ot
2jT
1
= - rK e- rr N(d2)- aS;)/ )
=

oC
ot

- rKe- rr N(d2)- aKe- rrN'(d2)

by (7)
by (4)
by (4)

2jT
=-K e- rr [r N (d2)

+ a~~2 ) ]

For the rho we have

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

(SN'(d1)- Ke- rr N'(d2)]

= TK e- rr N(rh)

by (6)
by (4) .

Finally, the vega is

Vc

~: = SN'(dt)~; -Ke-rrN'(d2)~~

= ,;7-K e- rr N'(rh) + ~; [SN'(dt)- Ke- rr N'(rh)]

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 .

E xercise. The Greeks of the forward contract are

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.

E xercise. The Greeks of the p1Lt option are


{:)P

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

= {:)P = rKe- rrN(-d2)- CTSN'(dl) =Ke- rr [rN(-d2)- CTN'(d2)] '


m
2,;72,;7-

rho:

PP

11ega:

Vp

= ~: = ,;7-SN'(di) = ,;7-K e- rr N'(d2)

-- - - - -

0: =

-TKe- rrN(-d2) ,

(In order to better int.erpret the forma?Llae, recall that for every x, N'(x)

= N'( -x)).

Divide nd paying stock

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)

E xer cise. It holds

and form?Llae (5), (6), (7) and (8) remain the same in the non-dividend paying case.

Exercise. The gre.ek.<; for the call option are:


della:
gamma:
theta:

rho:
ve,qa:

We know t.he forward price in Lhe dividend paying case t.o be F

=8e

or -

K e

rr

Exer cise. De.dtLce lhe Greek.<; of the forward contract.


Put. call parit.y relat.ion remains formally Lhe same: C - P - F; of course all t.he quantitie.>
involved have to be computed by the formulae for Lhe dividend paying ca.c;e.

Exercise. Using put-call par'ity and the pr'evious re.<;tLlL'i, obtain the Greeks of the put option.

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