The standard normal random variable used in the calculation of cumulative normal probabilities within the Black-Scholes-Merton option pricing model is
A)the lognormal distribution
B)the d1 and d2 statistic
C)the z statistic
D)the f distribution
E)none of the above

Question

Quizplus · Accepted Answer

The standard normal random variable used in the Black-Scholes-Merton option pricing model is the z statistic, which is obtained by standardizing the log return. The d1 and d2 statistics are derived from the z statistic and are used in the calculation of Black-Scholes option prices, but they are not the standard normal random variable themselves. The lognormal distribution and the f distribution are not used in the calculation of cumulative normal probabilities within the Black-Scholes-Merton option pricing model.

The Standard Normal Random Variable Used in the Calculation of Cumulative