N(-d2) ?

Discussion in 'P1.T4. Valuation & Risk Models (30%)' started by crablegs, Oct 11, 2011.

  1. crablegs

    crablegs Member

    Rho (put) formula has the following : N(-d2), however cummulative Z-table is only for positive #'s?

    Thank you,
  2. David Harper CFA FRM

    David Harper CFA FRM David Harper CFA FRM (test) Staff Member

    Hi Glen

    But (and GARP does likes to test this) the normal is symmetrical such that N(-d2) = 1-N(d2).Or, N(-z) = 1 - N(z).

    For example, say you want N(-1.645) which is area under curve to the left of -1.645 deviates.
    That's the left tail, which by symmetry, is the same area as its "matching" right tail, to the right of + 1.645.
    We know the area to the left of + 1.645? This is the definition of CDF. It is N(1.645), such that to the right of +1.645 must be 1-N(1.645); all probabilities have area = 1.0.
    As left tail area must match, N(-1.645) = 1 - N(1.645) = 1 - 95%.

    Thanks, David
  3. crablegs

    crablegs Member

    Very helpful. Thank you very much.

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