(Derivatives & Risk Management - Options Pricing Model)
B-S Model -- Black-Sholes
UNDERSTANDING / DISCUSSION OF --> N(d D1) and N(d2):
(Standard normal distribution)
-Define each
-Explain the method of interpretation for each
-CDF and PDF graphical representation
-Describe how the N(d2) variable relates to the “Probability OTM” values quoted in Think-or-Swim (TOS) for a call and put.
EXTRA:
Explain how the delta (i.e., the N(d1) variable) can be used to estimate a hedge ratio and create a hedge position as part of a replicating portfolio. (Note that this refers to the B-S option pricing model.)?