Ch15 Q15.2 - Φ(d1) and Φ(d2)

[Sandor Kelemen]

Hello there,

Is it fair to expect the interpretation of Φ(d1) and Φ(d2) on this level of the study material? Searching at Wikipedia I have found some helpful material:

https://en.wikipedia.org/wiki/Black–Scholes_model#Black–Scholes_formula

section "Interpretation".

I was able to prove these "asset-or-nothing"/"cash-or-nothing" interpretations but just with the toolkit of the 16-17th 5-step method chapter. In the question solution the reasoning is as simple as "But the manager will not need to pay the £8.59 so the second term is not required".

Can you give me an interpretation how to see this that clearly just from the arguments presented in the material (note that in the chapter 15 the Black-Scholes explicit formulae are just given from nowhere, so it is hard to interpret immediately all terms involved)?

Thanks in advance,
Good luck with your exams .

 

[Hanna Hohner]

Hi Sándor,

I can recommend you a very good paper that was written explicitly with the purpose of explaining N(d1) and N(d2). It is really not evident for the first sight.

http://www.ltnielsen.com/wp-content/uploads/Understanding.pdf

I hope it helps, good luck!

Hanna