N(d1), N(d2) and forward risk neutral

Tropp · December 5th, 2002, 7:05 am

Hi,I know that N(d2) in the Black-Scholes model is the risk neutral probability of S(T)>X - i.e. Pr(S(T)>X) - but what about N(d1)?Can anyone explain what "forward risk neutral" is (Hull's book)? - has it anything to do whit N(d1)?Thanks. Tropp

mj · December 5th, 2002, 7:41 am

N(d_1) is the probabiility of finishing in the money in the martingale measure with the stock as numeraire whereasN(d_2) is the corresponding probability with riskless bond as numeraire.MJ

amit7ul · September 1st, 2005, 6:19 am

Hi MJ , could you please throw more light on interpretation of 'risk neutral probablities' N(d1) and N(d2)

yes · September 1st, 2005, 10:38 am

Hi, u may (as well) want to search the technical forum for n(d1).Y

aschenck80 · September 1st, 2005, 1:35 pm

amit,assume interest rates are zero for simplicity:Therefore, as mj said, N(d1) is the probability under share measure that you finish ITM and N(d2) is the corresponding probability under the bond measure.-a

cosmologist · September 2nd, 2005, 3:52 am

Just one more advice,All the new guys to Finance should read one book on measure.Shreve should be a good starting point. I find the book fabulous.By the way, take my choice of books with a pinch of salt. I like all books and find each of them good,may be because I have been lucky to come across the best .Hull is not enough for a deeper understanding of the stuff.cheers