How do you find N(d1) in Black-SChloes?

[skoh]

Hi all,
how are we suppose to find N(d1) after we have computed d1 value?

Thanks

 

[David Harper CFA FRM]

Hi skoh,

In sitting for the FRM exam, you are not expected to be able to find N(d1)

• Except if it is N(1.65) = 0.95 or N(2.33) = 0.99, as you will be quite familiar with these; also, it is good to know N(1.96) and N(2.58) as the corresponding two-tailed CDFs
• Two of the approved calculators, apparently, can return N(.): HP20b and HPbII+, see http://forum.bionicturtle.com/threa...ummary-sheet-available.4902/page-2#post-18667
• Otherwise, in Excel =NORM.S.DIST(z, true) returns CDF; and, the FRM econometrics text is typical in that it locates the standard normal "Z-table" in the Appendix (Table 1).
• For the exam, GARP will either give you "N(z) = 0.xx" or, less likely but possible as illustrated in one of my mock exams, could give you a "table snippet" of the Z table

 

[ShaktiRathore]

N(d1) is the probability of stock price S>X the exercise price.It is nothing but a cumulative normal distribution values we find for one tailed tests using z values. It can be found by calculating area to the right of d1.can be found from z statistical tables at back. for e.g. if d1=1.645 the N(1.645) is 5% the probability of S>X. Look for z=1.645 for one tailed distribution tests and look for area to right of z.
similarly N(d2) is area to the left of 1.645.
thanks

 

[David Harper CFA FRM]

ShaktiRathore, I think you mean "N(d2) is the [risk neutral] probability of stock price S>X the exercise price?" ... N(d1) is delta,

but thank you, i did forget to preface with point that d1 = Z standard normal deviate

 

[skoh]

Hi David and Shakti,

Sorry but I'm pretty lost. Should I be using the Cumulative Z table or Alternative Z table? I have just started on my FRM preparation so I don't know how to derive N(1.65) = 0.95 or N(2.33) = 0.99.

 

[ShaktiRathore]

Hi, you should use cumulative Z table see value for 1.645 as 1.6 on left column and take the mean of match with value on .04/.05 in top row.so that N(1.645)=.95
see http://forum.bionicturtle.com/threads/valuing-a-call-option-bsm-model.556/