Question

In the Black-Scholes option pricing formula, N(d₁) is the probability that a standardized, normally distributed random variable is: (choose one correct answer)

1. equal to d1.

2. less than or equal to N(d2).

3. equal to one.

4. less than or equal to d1.

5. less than one.

Answer 1

In the Black-Scholes option pricing formula, N(d1) is the probability that a standardized, normally distributed random variable is less than or equal to d1

N(x) is a cumulative normal distribution function, and it signifies the probability that a standardized, normally distributed random variable is less than or equal to x

The series 1 here is the probability, that the standardized, normally distributed random variable is less than or equal to 'x'. As x increases, probability moves close to 1.

In the Black Scholes option pricing formula, the call option price is given by

Here is the current stock price and the strike price is X

Here, N(d1) is the factor or probability by which the discounted expected value exceeds the current value of the stock.