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Continuity correction Q10 2008

C

cgibs

Member
Hi can someone please explain how the continuity correction was done in Q10 dont get any help appreciated. :)
 
continuity corrections

The original amounts paid out must be multiples of £100. So in the original discrete distributions, if we are to draw a picture of them, we would have sticks of probabilities at £100, £200, £300, etc.

When we approximate using a normal, and we want the probability that the total amount is strictly greater than 500, this means that it must be £600, £700, £800 etc.

The stick of probability at £600 is approximated (under the normal curve) by an area from 550 to 650. The stick at £700 is approximated by an area form 650 to 750, and so on.

So we want (in total), the area to the right of 550 under the normal curve.
 
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