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Binary Options: Fixed Odds Financial Bets by Hamish Raw

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3. Vega & Volatility

3.0 Introduction

Vega is a ratio that measures how much the bet price will change due to a change in implied volatility.

All option pricing needs to make assumptions about the behaviour of certain variables. Some are clearly inappropriate, e.g. two of the main assumptions behind the Black-Scholes option-pricing model are that volatility remains a constant and that continuous hedging is feasible, both of which are plainly not true. But financial theorem in general often needs to make these assumptions in order to draw comparisons between one instrument and another for evaluation purposes. The gross redemption yield of a bond is a case in point. In calculating the g.r.y. there is an implicit assumption that all dividends ...

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