Black–Scholes model Flashcards
Volatility is BSM is bassed off of …
The volatility of log returns
Stock prices are distributed
Log-normally
Which statistical process does the underlying follow in the BSM model
Geometric Brownian Motion
What does BSM implies
That the returns of the underlying follow a log normal distribution
which means that the log returns are continuously compunded and follow a normal distribution
log-normal returns follow which distribution
Normal distribution
Volatility in BSM is
Based off of the volatility of the log-returns and is constant.
It is the annualized standard deviation of continuously compunded log-return of the underlying.
Which distribution does prices follow in BSM
Log-normally
Which distribution does the stock return follow in BSM
Log Normal distribution
What does N(d1) represent
The hedge ratio
What does N(d2) represent
Probability call expires in the money
Porbability call expires out of the money
1-N(d2)
What does N(-d2) represent
Porbability put expires in the money
