In the Black-Scholes model as the share's price increases the values of N(d1) and N(d2) will ________ for a call and ________ for a put option.
A)increase; decrease
B)increase; increase
C)decrease; increase
D)decrease; decrease

Question

Quizplus · Accepted Answer

As the share's price increases, the probability of the option being exercised (i.e. N(d1)) increases for call options, and decreases for put options. Therefore, the values of N(d1) will increase for call options and decrease for put options. Similarly, the probability of the option expiring in-the-money (i.e. N(d2)) increases for both call and put options as the share's price increases, but at a slower rate for put options. Therefore, the values of N(d2) will increase for call options and decrease for put options.

In the Black-Scholes Model as the Share's Price Increases the Values