In the Black-Scholes option pricing formula, N(d₁) is the probability that a standardized, normally distributed random variable is:
A) less than or equal to N(d₂).
B) less than 1.
C) equal to 1.
D) equal to d₁.
E) less than or equal to d₁.

Question

Quizplus · Accepted Answer

The option pricing formula refers to the probability density function of a standardized, normally distributed random variable. N(d₁) is the cumulative distribution function of a standard normal variable up to d₁. Therefore, N(d₁) gives the probability that the standardized, normally distributed random variable is less than or equal to d₁, i.e., option's spot price is less than or equal to the exercise price.

In the Black-Scholes Option Pricing Formula, N(d₁) Is the Probability