Formulae Sheet (all other formulae should be memorised)

The Black-Scholes-Merton Formulas

c  S 0 N (d1 )  K e  rT N (d 2 )
p  K e  rT N (d 2 )  S 0 N (d1 )
ln( S 0 / K )  (r   2 / 2)T
where d1 
 T
ln( S 0 / K )  (r   2 / 2)T
d2   d1   T
 T

Theta

S 0 N (d1 )
(call )    rKe  rT N (d 2 )
2 T
1  12 x 2
with N ( x)  e
2

S 0 N (d1 )
( put)    rKe  rT N (d 2 )
2 T

Gamma

N (d1 )

S 0 T
1
1  2 x2
with N ( x)  e
2

Relationship between Delta, Gamma, and Theta

1
  rS0    2 S 0   r
2

Delta neutral portfolio,

2
   t + ½S

1
Vega

v  S0 T N (d1 )
1  12 x 2
with N ( x)  e
2

Rho

rho(call)  KTe  rT N (d 2 )

rho( put)   KTe  rT N (d 2 )

Greek Letters for European Options on an Asset that Provides a Yield at Rate q

Duration of a bond that provides cash flow ci at time t:

n
 c e  yti 
D   ti  i 
i 1  B 

2
Convexity
n

1  2B c t e i i
2  yt i

C  i 1
B y 2 B

Or

1 n
 CFt 
2 
Convexity  (t 2  t )
B  (1  y) t 1  (1  y) t


Equity Prices: Merton’s Model

E0  V0 N (d1 )  De  rT N (d 2 )
where
ln (V0 D)  (r   V2 2)T
d1  ; d 2  d1   V T
V T

σE from historical data or options:

E
 E E0   V V0  N (d1 ) V V0
V