You are on page 1of 1

MATH 348: FINANCIAL MATHEMATICS

BLACK-SCHOLES AND THE GREEKS

DUNCAN J. MELVILLE

1. The Black-Scholes formula


Recall that for a European option we have
(1.1) C E (0) = S(0)N (d1 ) − Xe−rT N (d2 ),
where
¡ ¢ ¡ ¢
ln( S(0) 2
X ) + r + σ /2 T ln( S(0) 2
X ) + r − σ /2 T
d1 = √ and d2 = √
σ T σ T
The Black-Scholes formula can be generalized to apply to any time t, with 0 <
t ≤ T as
(1.2) C E (t) = S(t)N (d1 ) − Xe−r(T −t) N (d2 ),
where now
¡ ¢ ¡ ¢
ln( S(t) 2
X ) + r + σ /2 (T − t) ln( S(t) 2
X ) + r − σ /2 (T − t)
d1 = √ and d2 = √
σ T −t σ T −t
The Put-Call Parity formula P E = C E − S(t) − Xe−rT together with the fact
that N (x) + N (−x) = 1 for any x gives the Black-Scholes formujla for puts:
(1.3) P E (t) = −S(t)N (−d1 ) + Xe−r(T −t) N (−d2 ).

2. The Greek derivatives


The option depends upon S, t, σ and r as well as the strike price X. The
associated partial derivatives are called the Greeks. Using the Black-Scholes model
we can derive explicit formulas for the derivatives. The Greek parameters for a call
option are given by
∂C
delta = = N (d1 ),
∂S
∂2C 1 d2
1
gamma = 2
= √ e− 2 ,
∂S Sσ 2πT
∂C Sσ d2
1
(2.1) theta = = − √ e− 2 − rXe−rT N (d2 ),
∂t 2 2πT

∂C S T d21
vega = = √ e− 2 ,
∂σ 2π
∂C
rho = = T Xe−rT N (d2 ).
∂r

Date: April 24, 2007.


1