(Derivatives & Risk Management - Options Pricing Model)

B-S Model -- Black-Sholes

UNDERSTANDING / DISCUSSION OF --> N(d D₁) and N(d₂):

(Standard normal distribution)

-Define each

-Explain the method of interpretation for each

-CDF and PDF graphical representation

-Describe how the N(d2) variable relates to the Probability OTM values quoted in any security in Think-or-Swim (TOS) for a call and put.

EXTRA:

Explain how the delta (i.e., the N(d1) variable) can be used to estimate a hedge ratio and create a hedge position as part of a replicating portfolio. (Note that this refers to the B-S option pricing model.)?

EVEN PARTIAL ANSWERS APPRECIATED if unable to provide an entire answer