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The Black-Scholes Model: Probability Density Functions (Part Two)

From Theory To Practice

Today, we continue our discussion on the Probability Density Functions that we find ‘hidden’ within the Black-Scholes Model. What we learn is that these functions effectively work to establish the probabilities that are associated with the options moving in-the-money or out-of-the-money. Frank joins the discussion again to remind us that there are cumulative density functions, standard normal variables, and z-scores, all working behind the scenes to determine these outputs.

You can watch every part of the Black-Scholes series below:

Part One: Pricing a Call

Part Two: Pricing a Put

Part Three: Probability Density Functions: Part One

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