in the Black and Scholes Formula
Claudio Pacati
May 15, 2013
1
N ondiv idend pay ing stock
In the Black and Scholes model the price of an European call option on a nondividend
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
(2)
,
T
+ (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 rr N' (d2)
= 88 2 = 8a.;T =
8 2a.;T
=
delta:
b.c
gamma:
rc
theta:
= _ K  rr N(d ) _
E·~7C = fJC
fJL
r e
2
rho:
PC=
c;;: =
11ega:
Vc =
~: = .;T8N'(dt) = .;TK e rr N'(d2)
T
a8N'(dt) = K  rr [ N(d ) a N'(d2) ]
e
r
2 +
2 VT
2 VT
,
Ke rr N(rh) ,
In order to prove the theorem we collect some common calculations in the following
Le mma 1. It holds
8N'(dt) Ke rr N'(d2) = 0 ,
f)dl
orh
88
88
f)dl
orh
or
od2 od1
fJt
fJt
od1 _ od2 =
oa
oa

1
(4)
1
8a,;T '
V7
a
fJr
a
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
s
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.
D
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
r
c
= 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) .
2
Finally, the vega is
Vc
=
~: = SN'(dt)~; KerrN'(d2)~~
= ,;7K e rr N'(rh) + ~; [SN'(dt) Ke rr N'(rh)]
by (8)
= ,;7K e rr N'(rh)
= ,;7SN'(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 putcall 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
= ~: = ,;7SN'(di) = ,;7K e rr N'(d2)

    
0: =
TKe rrN(d2) ,
(In order to better int.erpret the forma?Llae, recall that for every x, N'(x)
2
= 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 nondividend paying case.
3
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 Gr·eek.<; 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 putcall par'ity and the pr'evious re.<;tLlL'i, obtain the Greeks of the put option.
4