Using the NAG Library to calculate nancial

option prices in Excel

Marcin Krzysztok

and Jeremy Walton

The Numerical Algorithms Group Ltd.

1 Introduction
This note discusses the use of algorithms from the NAG Library [18] to
calculate prices for nancial options. More specically, we focus on the way in
which NAG routines can be called from within a Microsoft Excel spreadsheet,
and illustrate this with some examples.
Our paper is arranged as follows. The following section presents an ele-
mentary introduction to options ( 2.1), and the variety of models that have
been developed for their pricing ( 2.2). The sensitivity of the price to vari-
ous dependent parameters is also of interest; this information is contained in
the partial derivatives of the price, which are known as the Greeks (see 3).
Section 4 presents an example of one of the option pricing models, along with
its closed-form expressions for the price and the Greeks. The calculation of
the results from this model (and for many others) can be performed using
NAG Library routines ( 5); we discuss this in some detail for the rst of our
two examples which calls a NAG routine from Excel ( 5.1), before presenting
a more complicated example ( 5.2) to illustrate further possibilities in the
determination and analysis of the behaviour of option pricesfor example,
the visualization of the results within Excel. Finally, we describe ( 5.3) how
the interested reader can access the examples that we have discussed, and
conclude ( 6) with some ideas for further work.
2 Options and option pricing
2.1 An introduction to options
An option is a contract between two parties (called the holder and writer)
that gives the holder the rightbut not the obligationto buy or sell an
asset at an agreed price (called the strike price) at the end of, or during,
a specied period. It is a nancial instrument which is an example of a

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1
derivative; that is, its value is based upon something elsein this case the
asset (which is said to underlie the option)
1
. The strike price is specied
when the holder and seller enter into the option; the point marking the end
of the specied period (when the option is said to expire) is called its maturity
date. An option allowing the holder to buy the asset is a call option, while a
put option allows them to sell the asset.
If the holder chooses to exercise the option, the writer is obliged to sell or
buy the asset at the strike price; otherwise, the option is allowed to expire.
The type of option determines when, how and under what circumstances the
holder can exercise [11]. For example, European-style options may only be
exercised on the maturity date, while American-style options can be exercised
at any point before expiration. The holder decides whether or not to exercise
the option based on its payo, which is related to the dierence between the
strike price and the current value (sometimes called the spot price) of the
asset.
European and American options are often described as vanilla, owing
to their comparatively simple payo model (see 4, below). There also
exist a variety of so-called exotic options, which involve more complicated
calculationsfor example, Asian-style options have a payo which depends
on the average price of the underlying asset over some pre-set period of time,
and Barrier-style options cannot be exercised until the price of the underlying
asset passes a specied value (or barrier).
2.2 Pricing options
Options are widely traded on nancial markets, and so some method of
determining the value (or price) of a given option is required. However, this
is non-trivial in general, partly because it depends on several variables in
addition to the value of the underlying assetincluding the strike price and
time to expiry, as well as the risk-free interest rate and the assets volatility.
In addition, the determination of the option price requires the construction
of a model for the way in which the asset price changes over time. This
process is essentially a random walk, and several quantitative techniques
usually based on stochastic calculushave been developed for constructing
these models, which are then implemented using a range of mathematical
methodsincluding analytical solution, nite dierence and nite element
methods and Monte Carlo simulation. This note only considers the rst of
these methods, but we also briey mention further work which uses some of
1
The underlying asset can be a piece of property, another derivativesuch as a futures
contractor a stock (which is what is sometimes assumed in the notation for this article).
2
the other implementation methods in Section 6.
One of the most popular models is that of Black and Scholes [3], which
leads to a partial dierential equation (PDE) that can be solved analytically
to give closed-form expressions for the value of a European put and call
optionsee 4, belowbut this is only one of a variety of models [9] for
option pricing, each of which make dierent assumptions about the behaviour
of the asset price. Many of these models have analytic solutions, which may
be evaluated using NAG Library routines; we discuss this in detail in 5,
below.
3 The Greeks
Besides seeking some estimate of the behaviour of the option price itself,
traders are interested in its sensitivity to changes in its dependent parameters
(such as, for example, the asset price). These sensitivities can be formally
represented as partial derivatives, andbecause they are often denoted by
Greek lettersare usually referred to as the Greeks.
Greeks are used by traders to help quantify risk. For example, Deltasee
equation (1), belowis employed in so-called delta hedging. This is a risk-
reducing strategy which involves having a short position
2
on the underlying
asset and osetting it with a long position
3
on an option, or vice versa (buying
an asset and shorting an option).
3.1 Delta
Delta () is the sensitivity of the option price P to a small change in the
underlying asset price, S.
=
P
S
(1)
2
A trader who borrows an asset from a third party and sells it, expecting to be able to
buy it back at a later date to return to the lender is said to be opening a short position.
The expectation is that the price of the asset will fall between its sale and purchase,
resulting in a prot for the trader.
3
A trader who buys an asset in order to sell it at a later date is said to be opening
a long position. The expectation is that the price of the asset will increase between its
purchase and sale, resulting in a prot for the trader.
3
3.2 Vega
V ega () measures the rate of change of the option price with respect to the
underlying asset volatility, .
=
P

(2)
3.3 Theta
Theta () is the sensitivity of the option price to a change in the time to
expiry of the option, T. Because the time to expiry is always decreasing
(unlike the other dependent parameters which can increase or decrease), it
is conventional to take the negative of the partial derivative.
=
P
T
(3)
3.4 Rho
Rho () is the rate of change of the option price with respect to the annual
risk-free interest rate, r.
=
P
r
(4)
3.5 Crho
Carryrho (Crho) is the sensitivity of the option price to a change in the so-
called annual cost of carry rate, bthat is, the cost of carrying, or holding, a
position. When the asset is a stock, this is dened as the dierence between
the risk-free interest rate and q, the stocks dividend yield; thus b = r q.
Crho =
P
b
(5)
3.6 Gamma
Gamma () is the sensitivity of Delta to a small change in the price of the
underlying asset.
=

S
=

2
P
S
2
(6)
4
3.7 Vanna
V anna shows how sensitive Delta is to a small change in the underlying asset
volatility (or, equivalently, how much V ega will change for a small change in
the asset price).
V anna =

=

S
=

2
P
S
(7)
3.8 Charm
Charm is Deltas sensitivity to changes in time (or, equivalently, Thetas
sensitivity to small changes in the asset price).
Charm =

T
=

S
=

2
P
ST
(8)
3.9 Speed
Speed is the sensitivity of Gamma to a change in the price of the underlying
asset.
Speed =

S
=

3
P
S
3
(9)
3.10 Colour
Colour is the sensitivity of Gamma to a change in time (or, equivalently, the
sensitivity of Charm to a change in the asset price).
Colour =

T
=
Charm
S
=

3
P
S
2
T
(10)
3.11 Zomma
Zomma is the sensitivity of Gamma to changes in the volatility of the under-
lying asset (or, equivalently, V annas sensitivity to a change in asset price).
Zomma =

=
V anna
S
=

3
P
S
2

(11)
3.12 Vomma
V omma is the sensitivity of V ega to change in the volatility of the underlying
asset.
V omma =

=

2
P

2
(12)
5
4 The Black-Scholes model
As noted above, the Black-Scholes model [3] is a widely-used mathematical
representation of the behaviour of an asset. Its application results in the so-
called Black-Scholes partial dierential equation for the option price, which
is assumed to depend only on asset price and time, t:
P
t
+
1
2

2
S
2

2
P
S
2
+ (r q)S
P
S
rP = 0. (13)
To solve this for P, boundary conditions must rst be speciedfor example,
P(0, t) = 0, t (14)
lim
S
P(S, t) = S (15)
P(S, T) = max(S X, 0) (16)
which correspond to a European call option (boundary conditions corre-
sponding to a European put option can be specied in a similar fashion).
Note that equation (16), in which X is the strike price, is the formal deni-
tion of the payo for a call option
4
.
Having specied the boundary conditions
5
, the PDE can be transformed
into a diusion equation and then solved using standard methods, resulting
in closed-form expressions for the prices of a European call and put option:
P
c
= Se
qT
(d
1
) Xe
rT
(d
2
) , (17)
P
p
= Xe
rT
(d
2
) Se
qT
(d
1
) . (18)
Here,
d
1
=
ln (S/X) + (r q +
2
/2) T

T
, (19)
d
2
=
ln (S/X) + (r q
2
/2) T

T
, (20)
and
(x) =
1

e
z
2
/2
dz (21)
4
The payo for a put option is P(S, T) = max(X S, 0).
5
In addition, we make certain assumptions about the other parameters in equation
(13)for example, that , r and q are independent of timewhich are required for an
analytic solution. We return to this point below, in 6.
6
Figure 1: Option price as a function of expiry time for a call option, as given
by the Black-Scholes formula [equation (17)] with S = 55, = 30%, r = 5%,
q = 0 and X = 70.
is the cumulative normal distribution function. Figure 1 shows P
c
(T) as cal-
culated from equation (17) for specic values of the dependent parameters.
It shows how, according to this model of a European call, the price of the op-
tion decreases with the time to expiryi.e., the smaller the interval between
entering into the option and the point at which it can be exercised, the less
value the option has.
We can also use equation (17) to calculate P
c
(S) (at xed T), which is
displayed in Figure 2, along with the option payo
6
, given by equation (16).
Figure 2 shows thatagain, for this model of a European callthe price of
the option increases from zero as the strike price is approached (recall that
S is the price of the underlying asset at the time the option is entered into),
approaching the payo asymptotically as S is increased. Looking at gures
6
The payo is also sometimes known as the option intrinsic value, and the dierence
between the price and the intrinsic valuethat is, the distance between the two curves in
Figure 2is the option time value.
7
Figure 2: Option price as a function of assethere assumed to be a stock
price for a call option, as given by the Black-Scholes formula [equation (17)]
with T = 0.5 years, = 30%, r = 5%, q = 0, and X = 70. Also shown is the
payo for the option, given by equation (16).
1 and 2 together, it can be seen that, as T is decreased towards zero (i.e.
the maturity date is approached), the P
c
(S) curve moves closer to the option
payo, as is to be expected.
Given a closed-form solution for the option price, explicit formulae for
the Greeks may be readily found. For example, those corresponding to the
Black-Scholes model (obtained by substituting equations (17) and (18) into
the expressions of 3) are given in Table 1. We use these to plot (T) (which
represents the negative of the slope of the curve in Figure 1), shown in Figure
3, while taking the slope of P
c
(S) gives (S), which is plotted in Figure 4.
8
Figure 3: Theta as a function of expiry time for a call option, as given by
the Black-Scholes formula with the parameters of Figure 1.
5 NAG Library option pricing routines
Chapter S of the NAG Library [18] is devoted to approximations of special
functions in mathematics and physics, and contains several routines for cal-
culating these. The latest release of the library includes a number of option
pricing functions in this chapter, arising from a number of dierent models
(see Table 2). Beginning with the comparatively simple formula derived from
the Black-Scholes
7
model of 4, the chapter oers a range of routines for de-
termining the prices of options (both vanilla and exotic) which can be called
from within developers applications. We note in passing that, for reasons
of convenience, each pricing formulawith a few exceptionsis oered in
two routines: one that calculates the Greeks and one that doesnt (the ex-
ceptions are those modelsBjerksund and Stensland, Standard Barrier and
Hestonfor which estimates of the Greeks are not available in the current
7
Historically, these formulae are often labelled as Black-Scholes-Merton, which is the
notation used by the NAG Library documentation, as reected in Table 2.
9
Greek Formula

c
e
qT
(d
1
)

p
e
qT
(d
1
)

(d
1
)e
qT
S

T
Se
qT

(d
1
)

c

Se
qT

(d
1
)
2

T
+ qSe
qT
(d
1
) rXe
rT
(d
2
)

p

Se
qT

(d
1
)
2

T
qSe
qT
(d
1
) + rXe
rT
(d
2
)

c
TXe
rT
(d
2
)

p
TXe
rT
(d
2
)
Crho
c
TSe
qT
(d
1
)
Crho
p
TSe
qT
(d
1
)
V anna
e
qT
d
2

(d
1
)
Charm
c
e
qT

(d
1
)

rq

T

d
2
2T

q(d
1
)

Charm
p
e
qT

(d
1
)

rq

T

d
2
2T

+ q(d
1
)

Speed

1+
d
1

S
Colour

q +
(rq)d
1

T
+
1d
1
d
2
2T

Zomma

d
1
d
2
1

V omma

d
1
d
2

Table 1: Expressions for the Greeks in the Black-Scholes model. Delta,

Theta, Rho, Crho and Charm are dierent for call and put options; the
other Greeks are independent of this distinction.
10
release of the library).
The advantages of using a NAG routine (as opposed to user-developed
code) are well-known
8
: the implementation of every algorithm has been ex-
tensively tested for accuracy, reliability and stability, and is accessible from a
variety of programming environments. We illustrate this here by presenting
two examples showing how the NAG option pricing routines can be called
from within Microsoft Excel. We use Visual Basic for Applications (VBA)
which is the standard environment for adding functionality to Exceland
the NAG Fortran Library
9
in the form of a Dynamic Link Library (DLL);
it is then straightforward [19] to call Library routines from within a VBA
program which, in the simplest case, would be a mere wrapper around the
8
Although these advantages could perhaps be viewed as marginal in the case of the
formulae of 4, it should be noted that the expressions for prices and the Greeks in the
more sophisticated models are increasingly complicated.
9
Option pricing routines are also available in the NAG C Library and the NAG Library
for SMP and Multicore.
Figure 4: Delta as a function of asset price for a call option, as given by the
Black-Scholes formula with the parameters of Figure 2.
11
NAG function.
5.1 Example 1
The rst example is a simple VBA program which calls the S30ABF routine
to calculate the price of a European put option and the Greeks using the
Black-Scholes formula of 4. The code
10
, shown in Figure 5, can be in-
serted [19] into a Module Sheet of an Excel Workbook, allowing the function
NAG_option_price(X,S,T,Sigma,r,q) to be called from within a spread-
sheet in the workbook.
Some technical details about the code may be helpful. In VBA, the
Declare statement is used to include the denition of a DLL function; we use
it [19] near the beginning of our program to dene the interface to S30ABF,
which is to be found in the NAG DLL FLDLL224M_nag.dll. The syntax of
the Declare statement for each function in the NAG Library is part of the
distribution of the DLL (and is also available on the Web at [20]), and so
can be cut and pasted into our program. The rest of the code deals with the
declaration of other parameters, calling the NAG routine, checking for errors
it encounters (all of which in this case concern incorrect input values) and
transferring the results to an array which is passed back to the spreadsheet.
The parameters for NAG_option_price are X (strike price), S (underlying
asset price), T (time to expiry), Sigma (volatility), r (annual risk-free interest
rate) and q (dividend yield). Values for these variables can be entered into
the spreadsheet and passed into the function, which returns an array (the
output variable in the program) that contains (see Figure 5) the option price
and the Greeks. Figure 6 is a screenshot showing NAG_option_price being
called from a spreadsheet
11
.
We note in passing that the NAG option pricing routines are set up to
calculate P for multiple values of X and T. Thus for example, in Figure 5,
the third and fourth parameters in the call to S30ABF are m and n, dened
respectively as the number of strike prices and the the number of expiry
times to be used. Values for these are passed into the routine via the arrays
X(m) and T(n), while the output is returned in the two-dimensional arrays
10
See 5.3 for details about obtaining a copy of the code.
11
Note that NAG option price returns an array of values. In order to call a VBA
function which returns an array (and to have those values displayed in the spreadsheet),
we rst select the range of cells (in this case, thirteen of them) into which the array will be
written, type in the formulahere, NAG option price(C4,C5,C6,C7,C8,C9)and then
press CTRL SHIFT ENTER together (as opposed to pressing ENTER, which would only enter
the rst element of the array into the rst cell).
12
Routine Description Origin
S30AAF Black-Scholes-Merton option pricing formula [3, 15]
S30ABF Black-Scholes-Merton option pricing formula with Greeks [3, 15]
S30BAF Floating-strike lookback option pricing formula [8]
S30BBF Floating-strike lookback option pricing formula with
Greeks
[8]
S30CAF Binary option: cash-or-nothing option pricing formula [23]
S30CBF Binary option: cash-or-nothing option pricing formula
with Greeks
[23]
S30CCF Binary option: asset-or-nothing option pricing formula [23]
S30CDF Binary option: asset-or-nothing option pricing formula
with Greeks
[23]
S30FAF Standard barrier option pricing formula [9]
S30JAF Jump-diusion, Merton model, option pricing formula [9, 16]
S30JBF Jump-diusion, Merton model, option pricing formula
with Greeks
[9, 16]
S30NAF Heston model option pricing formula [1, 10, 13, 24]
S30QCF American option: Bjerksund and Stensland pricing for-
mula
[2, 7]
S30SAF Asian option: geometric continuous average rate option
pricing formula
[12]
S30SBF Asian option: geometric continuous average rate option
pricing formula with Greeks
[12]
Table 2: Option pricing routines in Mark 22 of the NAG Fortran Library.
13
each parameter must be declared explicitly
Option Explicit
arrays are numbered from 1 (default is 0)
Option Base 1
declaration of NAG routine S30ABF (provided by NAG)
Declare Sub S30ABF Lib "FLDLL224M_nag.dll" ( _
ByVal CALPUT As String, ByVal CALPUTLength As Long, _
ByRef m As Long, ByRef n As Long, ByRef X As Double, _
ByRef S As Double, ByRef T As Double, ByRef Sigma As Double, _
ByRef r As Double, ByRef q As Double, ByRef P As Double, _
ByRef LDP As Long, ByRef Delta As Double, _
ByRef Gamma As Double, ByRef Vega As Double, _
ByRef Theta As Double, ByRef Rho As Double, _
ByRef Crho As Double, ByRef Vanna As Double, _
ByRef Charm As Double, ByRef Speed As Double, _
ByRef Colour As Double, ByRef Zomma As Double, _
ByRef Vomma As Double, ByRef IFAIL As Long )
This function calculates an option price using a NAG routine
Function NAG_option_price( _
ByRef X As Double, ByRef S As Double, _
ByRef T As Double, ByRef Sigma As Double, _
ByRef r As Double, ByRef q As Double) As Variant
declaration of parameters
the option price
Dim P As Double
the Greeks
Dim Delta As Double, Gamma As Double, Vega As Double
Dim Theta As Double, Rho As Double, Crho As Double
Dim Vanna As Double, Charm As Double, Speed As Double
Dim Colour As Double, Zomma As Double, Vomma As Double
the error-checking parameter
Dim IFAIL As Long: IFAIL = 1
the array that will return option price and Greeks
Dim output(13, 1) As Double
error handling mechanism
On Error GoTo error_handler:
a call to the NAG routine
for details look at the documentation
Call S30ABF( _
"P", 1, 1, 1, X, S, T, Sigma, r, q, P, 1, _
Delta, Gamma, Vega, Theta, Rho, Crho, Vanna, _
Charm, Speed, Colour, Zomma, Vomma, IFAIL)
catching of possible errors
Select Case IFAIL
Case 4:
Err.Raise Number:=4, Description:= _
"On entry, X < z or X > 1/z, where z is " _
& "the safe range parameter."
Case 5:
Err.Raise Number:=5, Description:= _
"On entry, S < z or S > 1/z, where z is " _
& "the safe range parameter."
Case 6:
Err.Raise Number:=6, Description:= _
"On entry, T < z, where z is " _
& "the safe range parameter."
Case 7:
Err.Raise Number:=7, Description:= _
"On entry, Sigma <= 0.0."
Case 8:
Err.Raise Number:=8, Description:= _
"On entry, r <= 0.0."
Case 9:
Err.Raise Number:=9, Description:= _
"On entry, q <= 0.0."
End Select
the results are transferred into an array
output(1, 1) = P
output(2, 1) = Delta
output(3, 1) = Gamma
output(4, 1) = Vega
output(5, 1) = Theta
output(6, 1) = Rho
output(7, 1) = Crho
output(8, 1) = Vanna
output(9, 1) = Charm
output(10, 1) = Speed
output(11, 1) = Colour
output(12, 1) = Zomma
output(13, 1) = Vomma
the function returns an array of values
NAG_option_price = output
Exit Function
return a message in case of an error
error_handler:
NAG_option_price = Err.Description
Exit Function
End Function
Figure 5: VBA function which calls S30ABF to calculate the price of a
European put option and the Greeks using the Black-Scholes-Merton formula.
14
Figure 6: Calling the function NAG option price from within an Excel
spreadsheet.
P(m,n), Delta(m,n), etc
12
. In our example program, we only calculate a
single price and set of Greeks, so these variables are hardwired to 1, and P,
Delta, etc are dened as scalars.
5.2 Example 2
The second example (see Figure 7) is a more complicated VBA program
which allows the user to interactively select the option pricing model, choose
between a call and put option and set values for the dependent parameters.
After calling the appropriate NAG routine, Excels plotting capabilities are
used in the worksheet to visualize the dependency of the price and the Greek
on either the strike price or the time to expiry. The user can choose the
Greek which is to be plotted, select the plots x-axis and set the range of x
12
The leading dimension of these arrays is specied by the variable LDP (the twelfth
parameter in the call to S30ABF), which must be greater than or equal to m.
15
values to be plotted.
Note that the pricing model selected in the example displayed in Figure
7 is the so-called cash-or-nothing formula [23], as calculated by the S30CAF
routine. This type of option pays a xed amount, K, at expiration if the
asset price is greater than strike price for a call option, and vice-versa for a
put option. The prices of a call and a put option are then [25]:
P
c
= Ke
rT
(d
2
), (22)
P
p
= Ke
rT
(d
2
). (23)
[cf equations (17) and (18)]. Comparison of the upper plot in Figure 7 with
Figure 2 illustrates the qualitative dierence between dierent types of op-
tion.
5.3 Availability
An Excel workbook which contains the program of Example 1, together with
an extended version which returns option prices and Greeks that correspond
to multiple strike prices and expiry times, is available for download at [21].
A live demo of Example 2including audio commentary, and a discussion
of the contents of the programis available at [22]. Users who would like
a copy of the Excel workbook for Example 2 are asked to contact NAG at
[email protected].
6 Conclusions and future work
In this note, we have looked at calculation of nancial option prices in Excel
using the NAG Library. We have discussed the mechanism by which NAG
routines can be accessed from within an Excel worksheet, and illustrated this
with some examples.
Other aspects of this area remain to be studied, including the exploration
of how the NAG routines can be called from within other environments such
as MATLAB [6, 26]. In addition, alternative methods for estimating op-
tion prices can be implemented using routines from the NAG Library; these
include Monte Carlo simulation [14] and the numerical solution [17] of equa-
tion (13) and similar PDEs arising from other models such as Hestons [10].
More specically, we note the existence of a library routine [4] in chapter
D03 (which is devoted to the numerical solution of PDEs) for the solution
of the Black-Scholes PDE using a nite-dierence scheme. This implemen-
tation method allows the relaxation of some of the assumptions associated
16
Figure 7: An example Excel worksheet that uses several NAG option pricing
routines. The user can select the method, choose between a call and put
option (top left) and enter values for the dependent parameters (top centre).
The results from the calculation are displayed in the graphs on the right
(option price above, Greek below). The user can edit various aspects of the
graphs (including selecting the Greek to be plotted) via Excel Form controls
(bottom left).
with the derivation of the analytic solution to equation (13)for example,
the parameters , r and q can now vary with time. (There may also be dier-
ences in performance between a numerical solution and the evaluation of an
analytic expression.) Finally, for the sake of completeness, we mention a D03
routine [5] that evaluates the analytic solution to equation (13); this diers
from S30ABF in that it attempts to allow for time dependent parameters by
using their average instantaneous values in the calculation of the price and
the Greeks.
17
Acknowledgements
We thank Robert Tong, Mick Pont, Lawrence Mulholland, David Sayers and
John Holden for helpful discussions whilst preparing this note.
References
[1] H. Albrecher, P. Mayer, W. Schoutens, and J. Tistaert. The little Heston
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