Can someone explain to me what the formula for d1 or e1 is explaining? It’s a z score from my understanding, but what does it tell me? taking the normal dist of d2 is the proabibility that the bond will not default, what is taking the normal dist of d1?
I’ve even tried to look in the black scholes formula section in derivatives and couldn’t find anything.
If NORMSDIST(D2) = Prob(At > Dt) then What is NORMSDIST(D1)?
NORMSDIST is an Excel function: the probability that a standard normal variable has a value less than D1.
Think of the normal distribution stuff in Black-Scholes-Merton as the probabilities that the underlying price will be near the current price, or near the strike price. (That’s not exactly what they are, but it’s a good mental picture: the option value is a weighted average, weighted by probabilities.)
S2000, can you elaborate on the formula for D1 and why D2 = D1 - sdSQRT(t)… I understand that taking the distribution is giving a probability of the stock being equal to the strike price, but why d1 and d2? why not just one of them … I may be confused, and this may be irrelevant, I am just curious is all.