Explanation:
Increased volatility on down-and-out and up-and-out barrier options does not increase value because the closer the underlying instrument gets to the barrier price, the greater the chance the option will expire. Therefore, vega may be negative for a barrier option.
(Book 3, Module 41.2, LO 41.e)
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Question 12
Vega is the sensitivity of an option's price to changes in volatility. Increases in an underlying instrument's volatility will usually increase the value of options since increases in volatility produce a greater probability that an option will find its way into the money. Of the four options listed below, which investment has the potential to produce a negative vega measure?
A
Exchange options.
B
Call options.
C
Put options.
D
Barrier options.
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