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Strategies & Market Trends : The Covered Calls for Dummies Thread
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To: Tom Chwojko-Frank who wrote (240)4/25/2001 3:50:32 PM
From: GGorillaGirl  Read Replies (1) of 5205
 

The differential equation almost answers why. If I were to model options from scratch, I would take for granted the exponential decay in time. The tricky parts are N(d1) and N(d2), which are of order sqrt(t).

C = S N(d1) - X exp(-rt) N(d2)

Ok, so now d1 is or order sqrt(t), and d2 is of order t. The link defines N(x) as the cumulative normal probability. I like diff. eq., I hate statistics, but I thought that normal distributions were something like exp(-k^2), which again makes it exponential.

Could someone get a translator? :-)

dGGG
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