Consider an underlying stock with price $50 and implied volatility 25%. You purchase an at the money straddle on this stock by buying a 50 strike call and buying a 50 strike put. Each option has a multiplier of $100 and time to expiration of 20 trading days (assume 252 trading days in a year to calculate time to expiration in years). The continuously compounded risk free rate is 2%. You want to assess how the value of your straddle would change if the implied volatility increases to 26%, all else held the same. To do this, calculate the Vega of your straddle and use it to determine how much the value of the straddle would change by if the implied vol increases 1% to 26%. (Hint: Calculate Vega for each option and multiple by 100 for the multiplier. Then, multiply the total straddle Vega by (1%=0.01) in order to determine the effect of a 1% change. You are welcome to use the spreadsheet provided in class to get the Vega values.) Increase by 4.93 Decrease by 8.55 Increase by 2.24 Increase by 11.22