Hi all, does the vega Call Down&out (knock out in general) positive or negative.for a strike=barrier both in the money when I implement the formula in Hull I get negative vega.is that the case even when barrier#strike? is that the case when u price using local vol or stoch vol? is that the case for knock outs in general? and is it intuitive from a practitioner point of view?thanks

Suppose you have a up and out call on a stock, If the volatility of the stock goes up, the probability that the stock hits the barrier is bigger, so your option will have less value; The vega of a up and out call is negative.It' s the same thing for others knock out in general.regards,Kipi.

QuoteOriginally posted by: wstguruHi all, does the vega Call Down&out (knock out in general) positive or negative.for a strike=barrier both in the money when I implement the formula in Hull I get negative vega.is that the case even when barrier#strike? is that the case when u price using local vol or stoch vol? is that the case for knock outs in general? and is it intuitive from a practitioner point of view?thanksthe payoff is not montonic (always increasing with vol) so when the spot is very far off from the barrier it will behavelike a vanilla call with positive vega and then change sign..

You can see in blue a up and out call with a volatility at 30% and in red at 20%In the picture you can see that the vega change sign and even there is a spot where vega is null. Thus, it is a good thing to price your barrier with uncertain volatility model to have a better idea of the "real" vega