Friday, May 3, 2019

calculation - Verifying an identity of an equation for Black Scholes formula


I just started working on the Black Scholes formula with help of the book Financial option valuation by Higham. Apparently you are possible to derive the following function:


log(SN(d1)er(Tt)EN(d2))=0


From the Black scholes formula:
C(S,t)=SN(d1)Eer(Tt)N(d2)


I've been puzzling arround but I'm stuck. This is where I came so far, do you know where I'm going wrong?


log(SN(d1)er(Tt)EN(d2))=log(SN(d1))log(er(Tt)EN(d2))=0



Answer



I am trying to fill in what Richard left for the second part: exp(r(Tt))EN(d2)=12πexp(r(Tt))Eexp(12d22)=12πexp(r(Tt))Eexp(12(d1σTt)2)=12πexp(r(Tt))Eexp(12d2112σ2(Tt)+d1σTt)=12πexp(r(Tt))Eexp(12d21+ln(S/E)+r(Tt))=12πSexp(12d21)=SN(d1).

That is, lnSN(d1)exp(r(Tt))EN(d2)=0.



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