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  1. P

    Probability of default under Merton

    The Black-Scholes option pricing formula has d1=ln(S/K)+.... Yet, the Stulz reading and in the notes, has "BSM risk-neutral d2 is: d2=ln (S/K...) (p.8 of the notes). Should be not d1 and I understand replacing the risk-free for the mean drift. Trying to understand why we move from d1 to d2 by...
  2. Nicole Seaman

    YouTube T4-12: How to interpret N(d1) and N(d2) in Black Scholes Merton

    N(d1) is the option's delta and N(d2) is the probability that a call option will be exercised; that is, N(d2) is the probability that S(T) will be greater than K. David's XLS is here: https://trtl.bz/2E8qsmw
  3. Nicole Seaman

    YouTube T4-11: Black Scholes Merton option pricing model

    David gives a brief tour of a Black Scholes option pricing model. He highlights three of the questions that we get about this famous model. 1. How are dividends exactly treated? 2. Can we interperet N(d1) and N(d2)? 3. Is there any way to get an intuition about how this Black Scholes works short...
  4. Nicole Seaman

    P1.T4.816. Black-Scholes-Merton (BSM) for dividend-paying stocks and the early exercise decision for American-style options (Hull Ch.15)

    Learning objectives: Explain how dividends affect the decision to exercise early for American call and put options. Compute the value of a European option using the Black-Scholes-Merton model on a dividend-paying stock. Questions: 816.1. Brian is a Risk Analyst who is using the...
  5. Nicole Seaman

    P1.T4.814. The lognormal property of stock prices and the assumptions of Black-Scholes-Merton (BSM) (Hull Ch.15)

    Learning objectives: Explain the lognormal property of stock prices, the distribution of rates of return, and the calculation of expected return. Compute the realized return and historical volatility of a stock. Describe the assumptions underlying the Black-Scholes-Merton option pricing model...