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Black–Scholes model, Geometric Brownian motion, Model risk|星空物语聿

星空物语聿 · Bilibili · 2:59

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This segment explains the Black-Scholes-Merton option pricing formula: first statically displaying and hand-writing the call and put formulas as well as the definitions of d1d_1 and d2d_2; then working through a concrete example by substituting S0=60S_0=60, X=65X=65, r=11r=11%, σ=45σ=45%, and T=4/12T=4/12 into the formulas, yielding d1d_1≈-0.0371 and d2=−0.1871d_2=-0.1871, and reminding viewers to round before consulting tables. This segment mainly explains the application of the Black-Scholes option pricing formula. Through a concrete example, it demonstrates how to substitute parameters—such as stock price, strike price, interest rate, time to maturity, and standard deviation—into the formula to compute the intermediate variables d1d_1 and d2d_2, and then write down the expressions for European call and put option values. The video emphasizes that, in actual exams, the values of the standard normal cumulative distribution function N(d)N(d) are usually provided directly; thus, the key is to memorize the formula and substitute numbers correctly. Finally, the screen displays handwritten general formulas for review.

Use the learning inspector for key ideas and moments, or open the reading tabs for the complete notes.

Chapters

0:00Formula overview and learning objectives0:22Handwriting the call and put formulas1:10Handwriting the definitions of d1d_1 and d2d_21:44Example substitution and intermediate variable calculation2:30Numerical substitution example for the Black-Scholes formula2:42Formula summary and memorization tips2:54End of the video

Learning script

Generated from the video's visuals and explanation; not verbatim speech.

This segment first introduces the topic: the final method for option pricing is the Black-Scholes-Merton formula. The full formula is already written on screen, and the instructor emphasizes that it is 'very brute-force', meaning values can be directly substituted for computation; it is also clarified that derivation is not required in this segment—only memorization of the formula is expected.

Next, the call option formula C=S0N(d1)−Xe−rTN(d2)C = S_0 N(d_1) - X e^{-rT} N(d_2) is handwritten on blank space. Verbally, each term is broken down and explained: S0S_0 is the current stock price, N(d1)N(d_1) is the value of the standard normal distribution at d1d_1, and the second term discounts the strike price XX to present value and multiplies it by N(d2)N(d_2).

Then the put option formula P=Xe−rTN(−d2)−S0N(−d1)P = X e^{-rT} N(-d_2) - S_0 N(-d_1) is written. The key here is not re-derivation but memorizing it by comparison with the call formula: the two terms swap positions, and the arguments inside NN all become their opposites. The video presents this as a memory-simplifying pattern.

Next, the two intermediate variables are filled in. First, d1=ln⁡(S0/X)+(r+σ2/2)TσTd_1 = \frac{\ln(S_0/X) + (r + \sigma^2/2)T}{\sigma\sqrt{T}} is written: the instructor reads aloud the numerator term by term—the logarithmic term, the interest rate term, and the variance term—then divides by σT\sigma\sqrt{T}. Then d2=d1−σTd_2 = d_1 - \sigma\sqrt{T} is written, explicitly stating that d2d_2 need not be recomputed from scratch, but is obtained by subtracting the same denominator quantity from d1d_1.

The page scrolls down to the example problem, which gives a set of specific parameters: stock price 6060, strike price 6565, interest rate 11%11\%, standard deviation 45%45\%, and time to maturity 44 months. The instructor first converts the time to years, i.e., T=4/12T=4/12, then substitutes all parameters into the expressions for C0C_0 and P0P_0, yielding ready-to-compute expressions.

The example calculation begins with d1d_1: d1=ln⁡(60/65)+(11%+45%2/2)×4/1245%×4/12≈−0.0371d_1 = \frac{\ln(60/65) + (11\% + 45\%^2/2)\times 4/12}{45\%\times \sqrt{4/12}} \approx -0.0371. Then d2=d1−45%×4/12d_2 = d_1 - 45\%\times \sqrt{4/12} is used to obtain d2=−0.1871d_2 = -0.1871. Finally, the video reminds viewers that when actually looking up values in the standard normal distribution table, these two numbers must first be rounded to two decimal places before lookup.

Now let us examine a concrete example. Given the current stock price S0=60S_0 = 60, strike price X=65X = 65, risk-free interest rate r=11%r = 11\%, standard deviation σ=45%\sigma = 45\%, and time to maturity T=4/12T = 4/12 years, we need to compute the values of European call and put options.

First, we substitute these numbers into the Black-Scholes formula. For the call option, the formula is C0=S0N(d1)−Xe−rTN(d2)C_0 = S_0 N(d_1) - X e^{-rT} N(d_2). After substitution, we obtain C0=60N(d1)−65e−11%×4/12N(d2)C_0 = 60 N(d_1) - 65 e^{-11\% \times 4/12} N(d_2).

Next, we compute the intermediate variable d1d_1. Its formula is d1=ln⁡(S0/X)+(r+σ2/2)TσTd_1 = \frac{\ln(S_0/X) + (r + \sigma^2/2)T}{\sigma\sqrt{T}}. Substituting the values: d1=ln⁡(60/65)+(11%+45%2/2)×4/1245%×4/12d_1 = \frac{\ln(60/65) + (11\% + 45\%^2/2) \times 4/12}{45\% \times \sqrt{4/12}}. After calculation, we obtain d1≈−0.0371d_1 \approx -0.0371.

Then we compute d2d_2. Its formula is d2=d1−σTd_2 = d_1 - \sigma\sqrt{T}. Substituting the previously computed d1d_1 and the known parameters: d2=−0.0371−45%×4/12=−0.1871d_2 = -0.0371 - 45\% \times \sqrt{4/12} = -0.1871.

For the put option, the formula is P0=Xe−rTN(−d2)−S0N(−d1)P_0 = X e^{-rT} N(-d_2) - S_0 N(-d_1). After substitution, we obtain P0=65e−11%×4/12N(0.1871)−60N(0.0371)P_0 = 65 e^{-11\% \times 4/12} N(0.1871) - 60 N(0.0371).

Note that N(d1)N(d_1) and N(d2)N(d_2) here represent the cumulative probabilities of the standard normal distribution. In typical exams or exercises, these values are usually provided directly, or you may simply write the expression containing N(d)N(d) without computing the final numerical result.

Therefore, the key to solving this type of problem is to memorize these formulas and then accurately substitute the given numbers into them. Once you have the formulas firmly in mind, the calculation process is actually very straightforward and simple.

Let us review the handwritten general formulas: call option C=S0N(d1)−Xe−rTN(d2)C = S_0 N(d_1) - X e^{-rT} N(d_2), put option P=Xe−rTN(−d2)−S0N(−d1)P = X e^{-rT} N(-d_2) - S_0 N(-d_1), and the definitions of d1d_1 and d2d_2. Memorize these thoroughly, and you will have no fear when solving problems.

Knowledge cards

01

Learning objective for the Black-Scholes-Merton formula

The video introduces the Black-Scholes-Merton formula as a 'plug-and-chug' method for option pricing, emphasizing that the current learning focus is on memorizing the formula and performing numerical substitution—not on mastering complex derivations.

02

Call option formula

The call option price is written as C=S0N(d1)−Xe−rTN(d2)C = S_0 N(d_1) - X e^{-rT} N(d_2), where S0S_0 is the current stock price, XX is the strike price, e−rTe^{-rT} represents discounting the future strike price to the present, and N(⋅)N(\cdot) is the standard normal cumulative distribution function.

C=S0N(d1)−Xe−rTN(d2)C = S_0 N(d_1) - X e^{-rT} N(d_2)
03

Put option formula

The put option price is written as P=Xe−rTN(−d2)−S0N(−d1)P = X e^{-rT} N(-d_2) - S_0 N(-d_1). The video suggests memorizing it by comparing it with the call formula: the two terms are swapped in order, and the argument of NN takes the opposite sign.

P=Xe−rTN(−d2)−S0N(−d1)P = X e^{-rT} N(-d_2) - S_0 N(-d_1)
04

Intermediate variable d1d_1

The definition of d1d_1 is d1=ln⁡(S0/X)+(r+σ2/2)TσTd_1 = \frac{\ln(S_0/X) + (r + \sigma^2/2)T}{\sigma\sqrt{T}}. Its numerator contains the logarithm of the price ratio and a drift term; its denominator is the product of volatility and the square root of time to maturity.

d1=ln⁡(S0/X)+(r+σ2/2)TσTd_1 = \frac{\ln(S_0/X) + (r + \sigma^2/2)T}{\sigma\sqrt{T}}
05

Intermediate variable d2d_2

d2d_2 is not recomputed separately but is derived from d2=d1−σTd_2 = d_1 - \sigma\sqrt{T}. The video uses this to reinforce the fixed order: compute d1d_1 first, then d2d_2.

d2=d1−σTd_2 = d_1 - \sigma\sqrt{T}
06

Substituting parameter values in the example

The example provides S0=60S_0=60, X=65X=65, r=11%r=11\%, σ=45%\sigma=45\%, and a maturity of 44 months, so T=4/12T=4/12. First substitute these values into the formulas for C0C_0, P0P_0, and d1d_1, d2d_2.

07

Computing d1d_1 and d2d_2 in the example

Substituting yields d1≈−0.0371d_1 \approx -0.0371, and then d2=d1−45%×4/12d_2 = d_1 - 45\%\times\sqrt{4/12} gives d2=−0.1871d_2 = -0.1871. The video reminds viewers to round both values to two decimal places before consulting the table.

d1≈−0.0371,d2=−0.1871d_1 \approx -0.0371,\quad d_2 = -0.1871
08

Black-Scholes call option formula

Used to compute the theoretical value of a European call option without dividends. The formula is C0=S0N(d1)−Xe−rTN(d2)C_0 = S_0 N(d_1) - X e^{-rT} N(d_2). Here, S0S_0 is the current stock price, XX is the strike price, rr is the risk-free interest rate, TT is the time to maturity, and N(⋅)N(\cdot) is the cumulative distribution function of the standard normal distribution.

C0=S0N(d1)−Xe−rTN(d2)C_0 = S_0 N(d_1) - X e^{-rT} N(d_2)
09

Black-Scholes put option formula

Used to compute the theoretical value of a European put option without dividends. The formula is P0=Xe−rTN(−d2)−S0N(−d1)P_0 = X e^{-rT} N(-d_2) - S_0 N(-d_1). The meanings of the symbols are the same as those in the call option formula.

P0=Xe−rTN(−d2)−S0N(−d1)P_0 = X e^{-rT} N(-d_2) - S_0 N(-d_1)
10

Calculation of the intermediate variable d1

In the Black-Scholes formula, d1d_1 is a key intermediate variable, whose calculation formula is d1=ln⁡(S0/X)+(r+σ2/2)TσTd_1 = \frac{\ln(S_0/X) + (r + \sigma^2/2)T}{\sigma\sqrt{T}}. You must first compute d1d_1 before proceeding to calculate the option value.

d1=ln⁡(S0/X)+(r+σ2/2)TσTd_1 = \frac{\ln(S_0/X) + (r + \sigma^2/2)T}{\sigma\sqrt{T}}
11

Calculation of the intermediate variable d2

d2d_2 can be conveniently obtained via d1d_1, with the formula being d2=d1−σTd_2 = d_1 - \sigma\sqrt{T}. This shows a direct linear relationship between d1d_1 and d2d_2.

d2=d1−σTd_2 = d_1 - \sigma\sqrt{T}
12

Exam tip: handling N(d)N(d) values

The video specifically points out that, in actual exams or practice problems, the standard normal distribution function values N(d1)N(d_1) and N(d2)N(d_2) are usually provided directly, or candidates are allowed to write only the expression containing N(d)N(d) without computing the final numerical value. Therefore, the focus should be on mastering the formula structure and parameter substitution.

Detailed learning notes

Explore conditions, steps and evidence. Supplementary explanations are labeled separately from content shown in the video.

Symbols · 21

C

Clear evidence
Shown in the video
Evidence
  1. Formula
    Observation

    The formula written at the top of the page is C=S0N(d1)−XeC = S_0 N(d_1) - X e^{-rT} N(d2)N(d_2), and it is handwritten again later.

Symbol

C

Meaning

call option price

Domain

option value

P

Clear evidence
Shown in the video
Evidence
  1. Formula
    Observation

    The formula written at the top of the page is P=XeP = X e^{-rT} N(−d2)−S0N(−d1)N(-d_2) - S_0 N(-d_1), and it is handwritten again later.

Symbol

P

Meaning

put option price

Domain

option value

S0S_0

Clear evidence
Shown in the video
Evidence
  1. Formula
    Observation

    appears in the formulas for C, P, and d1d_1.

  2. Audio
    Observation

    referred to as 'stock price' in the explanation.

Symbol

S0S_0

Meaning

current price of the underlying asset

Domain

positive price quantity

X

Clear evidence
Shown in the video
Evidence
  1. Formula
    Observation

    appears in the formulas for C, P, and d1d_1.

  2. Audio
    Observation

    referred to as 'exercise price' in the explanation.

Symbol

X

Meaning

option strike price

Domain

positive price quantity

r

Clear evidence
Shown in the video
Evidence
  1. Formula
    Observation

    appears in the exponential term e^{-rT} and in the numerator of d1d_1.

  2. Audio
    Observation

    In the explanation, r is read as an interest-rate-related parameter.

Symbol

r

Meaning

risk-free interest rate

Domain

annualized interest rate

T

Clear evidence
Shown in the video
Evidence
  1. Formula
    Observation

    appears in e^{-rT}, in the numerator and denominator σT\sigma\sqrt{T} of d1d_1.

  2. Audio
    Observation

    In the explanation, it says 'this maturity is four months'.

Symbol

T

Meaning

time to maturity

Domain

time length measured in years

σ\sigma

Clear evidence
Shown in the video
Evidence
  1. Formula
    Observation

    appears in the numerator of d1d_1 sigma to the power of2 over2 and in the denominator sigma times the square root of T.

  2. Audio
    Observation

    In the explanation, it says 'this becomes the variance', referring to σ2\sigma^2.

Symbol

σ\sigma

Meaning

volatility / standard deviation

Domain

non-negative parameter

N(⋅)N(\cdot)

Clear evidence
Shown in the video
Evidence
  1. Formula
    Observation

    written in the formula as N(d1)N(d_1), N(d2)N(d_2), N(−d1)N(-d_1), and N(−d2)N(-d_2).

  2. Audio
    Observation

    referred to in the explanation as the standard normal distribution.

Symbol

N(⋅)N(\cdot)

Meaning

cumulative distribution function of the standard normal distribution

Domain

real-number input, taking values in (0, 1)

d1d_1

Clear evidence
Shown in the video
Evidence
  1. Formula
    Observation

    the page gives d1=[ln⁡(S0/X)+(r+σ2/2)T]/(σT)d_1 = [\ln (S_0/X) + (r + \sigma^2/2)T]/(\sigma\sqrt{T}).

Symbol

d1d_1

Meaning

intermediate variable in the Black-Scholes-Merton formula

Domain

real number

d2d_2

Clear evidence
Shown in the video
Evidence
  1. Formula
    Observation

    the page gives d2=d1−σTd_2 = d_1 - \sigma\sqrt{T}.

Symbol

d2d_2

Meaning

intermediate variable in the Black-Scholes-Merton formula

Domain

real number

ln⁡\ln

Clear evidence
Shown in the video
Evidence
  1. Formula
    Observation

    The numerator of d1d_1 contains ln⁡(S0/X)\ln (S_0/X).

  2. Audio
    Observation

    Pronounced as 'ln' in the explanation.

Symbol

ln⁡\ln

Meaning

natural logarithm

Domain

positive real number

C0C_0

Clear evidence
Shown in the video
Evidence
  1. Formula
    Observation

    The current price of the option equals the current price of the underlying asset multiplied by the cumulative distribution function value of the standard normal distribution at d1, minus the strike price multiplied by e raised to the power of the negative product of the interest rate and the time to maturity, then multiplied by the cumulative distribution function value of the standard normal distribution at d2.

Symbol

C0C_0

Meaning

Current value of a European call option

Domain

real number

Knowledge points · 9

Introduction to the Black-Scholes-Merton pricing formula

Clear evidence
Shown in the video
Evidence
  1. Diagram
    Observation

    The green title reads 'III. Black-Scholes-Merton'.

  2. Audio
    Observation

    The instructor says, 'Then there is one final method for option pricing: the Black-Scholes-Merton pricing formula.'

Definition
Explanation

This segment focuses on the Black-Scholes-Merton formula in option pricing, first stating the formula's name and then requiring memorization of the formula itself without derivation.

Conditions
  1. Applicable to the topic of option pricing

  2. The video emphasizes memorizing the formula only.

Call option Black-Scholes-Merton formula

Clear evidence
Shown in the video
Evidence
  1. Formula
    Observation

    At the top of the page, C=S0N(d1)−XeC = S_0 N(d_1) - X e^{-rT} N(d2)N(d_2) is already written.

  2. Audio
    Observation

    While writing, the instructor says, 'The call option price equals the stock price S0S_0 multiplied by the standard normal distribution... minus the discounted strike price multiplied by the value of the standard normal distribution at d2d_2.'

Formula
Explanation

The call option price consists of the current stock price term minus the discounted strike price term, with both terms multiplied by the standard normal distribution evaluated at different intermediate variables.

Conditions
  1. Using the standard normal distribution function N(⋅)N(\cdot)

  2. Requires knowing S0S_0, X, r, T, σ\sigma and first computing d1d_1 and d2d_2

Prerequisites
  1. C
  2. S0S_0
  3. X
  4. r
  5. T
  6. σ\sigma
  7. N(⋅)N(\cdot)
  8. d1d_1
  9. d2d_2

Put option Black-Scholes-Merton formula

Clear evidence
Shown in the video
Evidence
  1. Formula
    Observation

    At the top of the page, P=XeP = X e^{-rT} N(−d2)−S0N(−d1)N(-d_2) - S_0 N(-d_1) is already written.

  2. Audio
    Observation

    The instructor says, "Then for P, there is actually a pattern following the one above... overall negative signs, and then inside them, the arguments also become negative."

Formula
Explanation

The put option formula mirrors the call option formula structurally, but the two terms are swapped and the arguments of N are negated.

Conditions
  1. Memorize by comparing with the call formula

  2. Requires knowing d1d_1, d2d_2 and their negatives to substitute into N(⋅)N(\cdot)

Prerequisites
  1. Call option Black-Scholes-Merton formula
  2. P
  3. N(⋅)N(\cdot)
  4. d1d_1
  5. d2d_2

Definition of the intermediate variable d1d_1

Clear evidence
Shown in the video
Evidence
  1. Formula
    Observation

    The page gives d1=[ln⁡(S0/X)+(r+σ2/2)T]/(σT)d_1 = [\ln (S_0/X) + (r + \sigma^2/2)T]/(\sigma\sqrt{T}).

  2. Audio
    Observation

    The instructor reads term by term: "The numerator is ln of S0 divided by X, the strike price, plus r plus one-half sigma squared, times T, then divided by sigma times the square root of T."

Formula
Explanation

d1d_1 is determined jointly by the logarithmic price ratio, the drift term, and the volatility term; it is the core intermediate quantity used before evaluating N(d1)N(d_1) and N(−d1)N(-d_1).

Conditions
  1. S0S_0 is greater than0 and X is greater than0 in order to take the natural log of S0S_0 over X

  2. σ>0\sigma > 0 is required for it to serve as a denominator.

  3. T\sqrt{T} is meaningful only when T>0T > 0.

Prerequisites
  1. d1d_1
  2. ln⁡\ln
  3. S0S_0
  4. X
  5. r
  6. σ\sigma
  7. T

Definition of the intermediate variable d2d_2

Clear evidence
Shown in the video
Evidence
  1. Formula
    Observation

    The page gives d2=d1−σTd_2 = d_1 - \sigma\sqrt{T}.

  2. Audio
    Observation

    The instructor says, 'Then d2d_2 equals d1d_1 minus this value in the denominator.'

Formula
Explanation

d2d_2 is not recomputed separately; instead, it is obtained by subtracting σT\sigma\sqrt{T} from d1d_1.

Conditions
  1. d1d_1 must be computed first.

Prerequisites
  1. d2d_2
  2. Definition of the intermediate variable d1d_1
  3. σ\sigma
  4. T

Black-Scholes European call option pricing formula

Clear evidence
Shown in the video
Evidence
  1. Formula
    Observation

    The current price of the option equals the current price of the underlying asset multiplied by the value of the standard normal cumulative distribution function corresponding to d1, minus the strike price multiplied by e raised to the power of the negative product of the interest rate and the expiration time, multiplied by the value of the standard normal cumulative distribution function corresponding to d2.

Formula
Explanation

Used to compute the theoretical value of a European call option without dividends.

Formula
C0=S0N(d1)−Xe−rTN(d2)C_0 = S_0 N(d_1) - X e^{-rT} N(d_2)
Conditions
  1. No stock dividends considered

  2. European option

Black-Scholes European put option pricing formula

Clear evidence
Shown in the video
Evidence
  1. Formula
    Observation

    The current price of the put option equals the strike price multiplied by e raised to the power of the negative product of the interest rate and the expiration time, multiplied by the value of the standard normal cumulative distribution function corresponding to negative d2, minus the current price of the underlying asset multiplied by the value of the standard normal cumulative distribution function corresponding to negative d1.

Formula
Explanation

Used to compute the theoretical value of a European put option without dividends.

Formula
P0=Xe−rTN(−d2)−S0N(−d1)P_0 = X e^{-rT} N(-d_2) - S_0 N(-d_1)
Conditions
  1. No dividend on the underlying stock

  2. European option

Formula for computing the intermediate variable d1d_1

Clear evidence
Shown in the video
Evidence
  1. Formula
    Observation

    d1 equals the natural logarithm of the ratio of the underlying asset's current price to the strike price, plus the sum of the interest rate and half the square of the volatility, all multiplied by the time to maturity, and the result is divided by the product of the volatility and the square root of the time to maturity

Formula
Explanation

Compute the intermediate variable d1d_1 required for the Black-Scholes formula.

Formula
d1=ln⁡(S0/X)+(r+σ2/2)TσTd_1 = \frac{\ln(S_0/X) + (r + \sigma^2/2)T}{\sigma\sqrt{T}}

Formula for computing the intermediate variable d2d_2

Clear evidence
Shown in the video
Evidence
  1. Formula
    Observation

    d2 equals d1 minus the product of the volatility and the square root of the time to maturity

Formula
Explanation

using d1d_1 another intermediate variable d_ required for the Black-Scholes formula2.

Formula
d2=d1−σTd_2 = d_1 - \sigma\sqrt{T}
Prerequisites
  1. Formula for computing the intermediate variable d1d_1
Claims and conditions · 2

The requirement for formula derivation in this segment

Clear evidence
Shown in the video
Evidence
  1. Audio
    Observation

    The instructor says, 'Because its derivation is relatively complex, you do not need to master the derivation—just memorize this formula.'

Proposition
Statement

The video states that, at this stage, learners do not need to master the derivation of the Black-Scholes-Merton formula; they only need to memorize the formula.

Hypotheses
  1. For the current learning segment

  2. Focuses on memorizing the formula rather than proving its derivation

The put formula can be memorized using the structural pattern of the call formula.

Clear evidence
Shown in the video
Evidence
  1. Audio
    Observation

    The instructor says, "Then for P, there is actually a pattern consistent with the one above... overall negative, and then inside, the argument must also become negative."

  2. Formula
    Observation

    The screen simultaneously displays both the C and P formulas, with the two terms in P swapped and the argument of N negated.

Proposition
Statement

By comparing the forms of C and P, the video explains that the put option formula can be memorized from the call formula following the rule: "swap the two terms and negate the argument of N."

Hypotheses
  1. The call option formula form is known.

  2. This is presented solely as a mnemonic rule, not a rigorous proof.

Derivations and proofs · 4

Substituting numerical values for d1d_1 and d2d_2 in the example problem.

Clear evidence
Shown in the video
Evidence
  1. Formula
    Observation

    In the example solution area, d1d_1 = [ln⁡(60/65)\ln (60/65) + (11% + 45%^2/22/2) * 4/124/12]/(45% * sqrt(4/124/12)) ≈ -0.0371.

  2. Formula
    Observation

    Then d2=d1−45d_2 = d_1 - 45% * sqrt(4/124/12) = -0.1871.

  3. Audio
    Observation

    The instructor says, "First compute d1... substitute these numbers in, and then it approximates to this value... when looking up these two values in the table, round to the nearest hundredth."

Uncertainties
  1. In the audio, r is pronounced as '11', but the on-screen example problem displays it as 11%; follow the on-screen percentage sign.

Numerical verification
Steps
  1. Expression
    d1=ln⁡(60/65)+(11%+45%2/2)×4/1245%×4/12d_1 = \frac{\ln(60/65) + (11\% + 45\%^2/2)\times 4/12}{45\%\times \sqrt{4/12}}
    Explanation

    Substitute the given values from the example problem—S0=60S_0=60, X=65X=65, r=11r=11%, σ=45\sigma=45%, and T=4/12T=4/12—into the definition of d1d_1.

    Justification

    Apply the ki-d1-formula to substitute parameters.

    Shown in the video
  2. Expression
    d1≈−0.0371d_1 \approx -0.0371
    Explanation

    After completing the numerical computation, obtain an approximate value for d1d_1.

    Justification

    The screen directly displays the computational result.

    Shown in the video
  3. Expression
    d2=d1−45%×4/12d_2 = d_1 - 45\%\times \sqrt{4/12}
    Explanation

    Substitute the already-computed d1d_1, along with volatility and time to maturity, into the expression defining d2d_2.

    Justification

    Apply the ki-d2-formula.

    Shown in the video
  4. Expression
    d2=−0.1871d_2 = -0.1871
    Explanation

    Obtain the numerical value of d2d_2.

    Justification

    The screen directly displays the computational result.

    Shown in the video
Conclusion

The example problem first computes d1d_1≈-0.0371, then uses d2=d1−σTd_2=d_1-\sigma\sqrt{T} to obtain d2=−0.1871d_2=-0.1871.

Memory steps for deriving the put formula from the call formula.

Clear evidence
Shown in the video
Evidence
  1. Audio
    Observation

    The instructor verbally summarizes: 'They are both negative overall, and then inside, they must become negative again.'

  2. Formula
    Observation

    In the image, C uses N(d1)N(d_1) and N(d2)N(d_2), while P uses N(−d2)N(-d_2) and N(−d1)N(-d_1), with the two terms swapped in order.

Intuitive argument
Steps
  1. Expression
    C=S0N(d1)−Xe−rTN(d2)C = S_0 N(d_1) - X e^{-rT} N(d_2)
    Explanation

    First, fix the call option formula as the reference.

    Justification

    The image already displays this formula.

    Shown in the video
  2. Expression
    P=Xe−rTN(−d2)−S0N(−d1)P = X e^{-rT} N(-d_2) - S_0 N(-d_1)
    Explanation

    Swap the positions of the two terms and change the arguments of all N functions to their opposites.

    Justification

    This is a memory aid summarized verbally in the video, not a formal proof.

    Shown in the video
Conclusion

The video explains how the put formula can be remembered from the call formula using patterns of sign changes and term ordering, via structural comparison.

Numerical derivation of d1d_1

Clear evidence
Shown in the video
Evidence
  1. Formula
    Observation

    d1 equals the natural logarithm of sixty-five over sixty, plus the sum of eleven percent and half the square of forty-five percent, all multiplied by four over twelve, and the result is divided by the product of forty-five percent and the square root of four over twelve, approximately equal to negative zero point zero three seven one

Numerical verification
Steps
  1. Expression
    ln⁡(60/65)+(11%+45%2/2)×4/12\ln(60/65) + (11\% + 45\%^2/2) \times 4/12
    Explanation

    Substitute the known parameters into the numerator of the d1d_1 formula.

    Justification

    Substitution method

    Shown in the video
  2. Expression
    45%×4/1245\% \times \sqrt{4/12}
    Explanation

    Compute the denominator of the d1d_1 formula.

    Justification

    Substitution method

    Shown in the video
  3. Expression
    −0.07918+0.042750.2598≈−0.0371\frac{-0.07918 + 0.04275}{0.2598} \approx -0.0371
    Explanation

    Obtain an approximate value for d1d_1.

    Justification

    Numerical computation

    Shown in the video
Conclusion

d1 is approximately negative zero point zero three seven one

Numerical derivation of d2d_2

Clear evidence
Shown in the video
Evidence
  1. Formula
    Observation

    d2 equals negative zero point zero three seven one minus the product of forty-five percent and the square root of four twelfths, resulting in negative zero point one eight seven one

Numerical verification
Steps
  1. Expression
    −0.0371−45%×4/12-0.0371 - 45\% \times \sqrt{4/12}
    Explanation

    Substitute the computed d1d_1 and the known parameters into the d2d_2 formula.

    Justification

    Substitution method

    Shown in the video
  2. Expression
    −0.0371−0.15=−0.1871-0.0371 - 0.15 = -0.1871
    Explanation

    Obtain the value of d2d_2.

    Justification

    Numerical computation

    Shown in the video
Conclusion

d2 equals negative zero point one eight seven one

Worked examples · 2

Substituting into the Black-Scholes-Merton formula

Clear evidence
Shown in the video
Evidence
  1. Formula
    Observation

    The example text states: "maturity of 4 months; standard deviation of 45%; strike price of 65; stock price of 60; interest rate of 11%".

  2. Formula
    Observation

    The solution area writes: C0=60N(d1)−65eC_0 = 60N(d_1) - 65e^{-11%\times 4/124/12}N(d2)N(d_2), and P0=65eP_0 = 65e^{-11%\times 4/124/12}N(−d2)−60N(−d1)N(-d_2) - 60N(-d_1).

  3. Formula
    Observation

    The solution area further gives d1d_1 ≈ -0.0371 and d2=−0.1871d_2 = -0.1871.

  4. Audio
    Observation

    The instructor says, "This maturity is four months… first compute d1d_1… substitute this number… when looking up the table, round to the nearest value."

Uncertainties
  1. In the audio, r is pronounced as "11", while the on-screen text shows 11%; interpret r as a percentage according to the on-screen text.

  2. At the end of the clip, the final option price value has not yet appeared; only d1d_1, d2d_2, and the formula setup are completed.

Problem

Write down the Black-Scholes option pricing formula and use it to compute the European option value for the following stock (assuming no dividend payments).

Given
  1. Time to maturity: 4 months

  2. Standard deviation: 45 percent

  3. Option strike price: 65

  4. Stock price: 60

  5. Interest rate: 11 percent

Goal

Write the call and put option value expressions, and first compute the intermediate variables d1d_1 and d2d_2.

Steps
  1. Expression
    T=4/12T = 4/12
    Explanation

    Convert "4 months" into annualized time to maturity.

    Justification

    In the formula, T is measured in years; the on-screen solution directly uses 4/124/12.

    Shown in the video
  2. Expression
    C0=60N(d1)−65e−11%×4/12N(d2)C_0 = 60N(d_1) - 65e^{-11\%\times 4/12}N(d_2)
    Explanation

    Substitute the known parameters into the call option formula.

    Justification

    Use ki-call-formula.

    Shown in the video
  3. Expression
    P0=65e−11%×4/12N(−d2)−60N(−d1)P_0 = 65e^{-11\%\times 4/12}N(-d_2) - 60N(-d_1)
    Explanation

    Substitute the known parameters into the put option formula.

    Justification

    Use ki-put-formula.

    Shown in the video
  4. Expression
    d1=ln⁡(60/65)+(11%+45%2/2)×4/1245%×4/12≈−0.0371d_1 = \frac{\ln(60/65) + (11\% + 45\%^2/2)\times 4/12}{45\%\times \sqrt{4/12}} \approx -0.0371
    Explanation

    First compute d1d_1.

    Justification

    Use ki-d1-formula and substitute the example data.

    Shown in the video
  5. Expression
    d2=d1−45%×4/12=−0.1871d_2 = d_1 - 45\%\times \sqrt{4/12} = -0.1871
    Explanation

    then use d1d_1 to compute d2d_2.

    Justification

    Use ki-d2-formula.

    Shown in the video
Answer

Within this segment, the visible results are d1d_1≈-0.0371 and d2=−0.1871d_2=-0.1871, and expressions for C0C_0 and P0P_0 are listed; the final numerical option price is not given in this segment.

Verification

The video notes that when looking up values in the table later, d1d_1 and d2d_2 should first be rounded to two decimal places before evaluating N(⋅)N(\cdot).

Black-Scholes option pricing example

Clear evidence
Shown in the video
Evidence
  1. Formula
    Observation

    Write the Black-Scholes option pricing formula and use it to compute the value of a European option on the following stock (assuming no dividends): maturity 4 months, volatility 45 percent, strike price 65, stock price 60, interest rate 11 percent.

Problem

Compute the value of a European option given the parameters.

Given
  1. Maturity T equals 4 divided by 12 years

  2. Volatility sigma equals 45 percent

  3. Strike price X equals 65

  4. Stock price S subscript 0 equals 60

  5. Interest rate r equals 11 percent

Goal

Derive expressions for C subscript 0 and P subscript 0.

Steps
  1. Expression
    C0=60N(d1)−65e−11%×4/12N(d2)C_0 = 60 N(d_1) - 65 e^{-11\% \times 4/12} N(d_2)
    Explanation

    Substitute the parameters into the call option formula.

    Justification

    Formula substitution

    Shown in the video
  2. Expression
    P0=65e−11%×4/12N(−d2)−60N(−d1)P_0 = 65 e^{-11\% \times 4/12} N(-d_2) - 60 N(-d_1)
    Explanation

    Substitute the parameters into the put option formula.

    Justification

    Formula substitution

    Shown in the video
  3. Expression
    d1≈−0.0371d_1 \approx -0.0371
    Explanation

    Compute the intermediate variable d1d_1.

    Justification

    Numerical calculation

    Shown in the video
  4. Expression
    d2=−0.1871d_2 = -0.1871
    Explanation

    Compute the intermediate variable d2d_2.

    Justification

    Numerical calculation

    Shown in the video
Answer

The current price of the call option equals sixty times the cumulative distribution function value of the standard normal distribution at negative zero point zero three seven one, minus sixty-five times e raised to the power of negative eleven percent multiplied by four twelfths, multiplied by the cumulative distribution function value of the standard normal distribution at negative zero point one eight seven one; the current price of the put option equals sixty-five times e raised to the power of negative eleven percent multiplied by four twelfths, multiplied by the cumulative distribution function value of the standard normal distribution at zero point one eight seven one, minus sixty times the cumulative distribution function value of the standard normal distribution at zero point zero three seven one

Verification

Since the N value is not provided, only the expression is written; the N value will be given in subsequent questions.

Visual events · 6

Opening shows the full formula page.

Clear evidence
Shown in the video
Evidence
  1. Diagram
    Observation

    The upper part of the screen statically displays a green title and three blue formulas: C, P, d1d_1, and d2d_2.

Objects
  1. Green title: "Three, Black-Scholes-Merton"

  2. The blue formula C=S0N(d1)−XeC = S_0 N(d_1) - X e^{-rT} N(d2)N(d_2)

  3. The blue formula P=XeP = X e^{-rT} N(−d2)−S0N(−d1)N(-d_2) - S_0 N(-d_1)

  4. The blue formula d1=[ln⁡(S0/X)+(r+σ2/2)T]/(σT)d_1 = [\ln (S_0/X) + (r + \sigma^2/2)T]/(\sigma\sqrt{T})

  5. The blue formula d2=d1−σTd_2 = d_1 - \sigma\sqrt{T}

Changes
  1. No writing action; the screen remains static as a formula overview.

Invariants
  1. The relative positions of the four formulas remain unchanged.

  2. The notation system remains consistent.

Interpretation

This segment first presents the complete formula framework using static board writing, establishing a reference for subsequent memorization and example substitution.

Handwriting to reproduce the call and put formulas.

Clear evidence
Shown in the video
Evidence
  1. Animation
    Observation

    The instructor handwrites the C formula and then the P formula in blank areas.

  2. Audio
    Observation

    While handwriting, the instructor verbally explains the meaning of each term.

Objects
  1. The newly written C formula

  2. Newly written put formula

  3. Original formula above

Changes
  1. First write C=S0N(d1)−XeC = S_0 N(d_1) - X e^{-rT} N(d2)N(d_2)

  2. Then write P=XeP = X e^{-rT} N(−d2)−S0N(−d1)N(-d_2) - S_0 N(-d_1)

  3. The writing order reflects the presentation sequence: call first, then put

Invariants
  1. The meanings of the symbols S0S_0, X, r, T, N, d1d_1, and d2d_2 remain unchanged

Interpretation

By handwriting from memory, abstract formulas are broken down into visible term sequences and symbol changes, highlighting the contrast between the put formula and the call formula.

Handwriting reproduction of intermediate variable formulas

Clear evidence
Shown in the video
Evidence
  1. Animation
    Observation

    The presenter continues handwriting the full fractional expression for d1d_1, then writes d2=d1−σTd_2 = d_1 - \sigma\sqrt{T}.

Objects
  1. Fractional expression for d1d_1

  2. Relationship for d2d_2

Changes
  1. First write the numerator of d1d_1: ln⁡(S0/X)\ln (S_0/X) and (r+σ2/2r+\sigma^2/2)T

  2. Next, write the denominator σT\sigma\sqrt{T}.

  3. Finally, write d2d_2 by subtracting σT\sigma\sqrt{T} from d1d_1.

Invariants
  1. d2d_2 always depends on d1d_1 and is not recalculated independently.

Interpretation

Visually fix the computation order as 'compute d1d_1 first, then compute d2d_2'.

Switch to the example and annotate with red pen.

Clear evidence
Shown in the video
Evidence
  1. Animation
    Observation

    Scroll the page down to the example section, where the problem statement and solution appear, with d1d_1, d2d_2, and other locations circled in red.

  2. Formula
    Observation

    The solution area displays parameter substitution and approximate results: d1d_1≈-0.0371, d2=−0.1871d_2=-0.1871.

Objects
  1. Example problem statement.

  2. Solution area: expressions for C0C_0 and P0P_0.

  3. Expression for computing d1d_1.

  4. Expression for computing d2d_2.

  5. Red circles and arrows.

Changes
  1. The screen scrolls from the formula memorization section to the example problem section.

  2. A red pen circles d1d_1, d2d_2, and the locations of related parameters.

  3. The numerical result is highlighted.

Invariants
  1. Problem parameters remain unchanged: S0=60S_0=60, X=65X=65, r=11r=11%, σ=45\sigma=45%, T=4/12T=4/12.

Interpretation

This segment applies the earlier general formula to concrete numbers, demonstrating the process of 'plugging into the formula—substituting parameters—computing intermediate variables.'

Key formula highlighting

Clear evidence
Shown in the video
Evidence
  1. Animation
    Observation

    Circle the N(d1)N(d_1) and N(d2)N(d_2) parts of the formula in red ink and underline them below.

Objects
  1. Black-Scholes formula

Changes
  1. Add red highlighting and circled annotations.

Invariants
  1. The mathematical structure of the formula itself remains unchanged.

Interpretation

Emphasize that N(d1)N(d_1) and N(d2)N(d_2) are key components when computing option value; typically, problems either provide these values or require looking them up in a table.

The page scrolls to display the handwritten formula.

Clear evidence
Shown in the video
Evidence
  1. Animation
    Observation

    The screen scrolls upward from a printed example solution to reveal a handwritten summary of the Black-Scholes formula.

Objects
  1. Printed example solution.

  2. Handwritten formula notes.

Changes
  1. The viewport shifts to show upper content.

Invariants
  1. The page content itself remains unchanged.

Interpretation

Transition from a specific example to memorizing and summarizing the general formula.

Misconceptions · 4

Mistakenly believing that mastering the formula's derivation is mandatory.

Clear evidence
Shown in the video
Evidence
  1. Audio
    Observation

    The instructor explicitly states, 'Because its derivation is relatively complex, you do not need to master the derivation—just memorize this formula.'

Misconception

When learning the Black-Scholes-Merton formula, one must fully understand the complete derivation before using it.

Clarification

In this segment, the video explicitly emphasizes memorizing the formula and substituting values, without requiring mastery of the derivation.

Incorrectly writing the put formula with the same positive arguments as the call formula.

Clear evidence
Shown in the video
Evidence
  1. Audio
    Observation

    The instructor emphasizes that the put formula 'follows a pattern with the one above' and says 'inside it, the arguments must become negative.'

  2. Formula
    Observation

    The visual shows that the arguments of N in P are -d_2 and -d_1, not d2d_2 and d1d_1.

Misconception

When writing the P formula, retain the notation N(d1)N(d_1) and N(d2)N(d_2) without changing the signs.

Clarification

The put formula shown in the video is P=XeP = X e^{-rT} N(−d2)−S0N(−d1)N(-d_2) - S_0 N(-d_1); the arguments inside N must be negated, and the order of the two terms is also swapped.

Do not round decimal places before consulting the table.

Clear evidence
Shown in the video
Evidence
  1. Audio
    Observation

    The instructor says, "When looking up these two values in the table, round them to the nearest hundredth."

Misconception

Directly look up the unrounded d1d_1 and d2d_2 in the standard normal distribution table.

Clarification

The video reminds viewers to first round d1d_1 and d2d_2 to the nearest hundredth, then look up the corresponding N(⋅)N(\cdot) values.

Obtaining values of N(d)N(d)

Clear evidence
Shown in the video
Evidence
  1. Audio
    Observation

    This value is usually given, or at least known; just substitute it in and compute the result.

  2. Formula
    Observation

    If N values are not provided, write only the expression; later questions will supply the N values.

Misconception

Students may think they must compute cumulative probabilities of the standard normal distribution themselves.

Clarification

The video points out that, in exams or exercises, values of N(d1)N(d_1) and N(d2)N(d_2) are usually provided directly, or it is acceptable to leave expressions containing N(d)N(d) unevaluated.

Concept relations · 7

Call option Black-Scholes-Merton formula → Put option Black-Scholes-Merton formula

Clear evidence
Shown in the video
Evidence
  1. Formula
    Observation

    The screen displays the C and P formulas side by side.

  2. Audio
    Observation

    The instructor says that P "follows a pattern visible above."

Contrast
Explanation

The put formula contrasts with the call formula in term order and in the sign of the argument of N; the video uses this contrast to aid memorization.

Definition of the intermediate variable d1d_1 → Definition of the intermediate variable d2d_2

Clear evidence
Shown in the video
Evidence
  1. Formula
    Observation

    The page first writes the definition of d1d_1, then writes d2=d1−σTd_2 = d_1 - \sigma\sqrt{T}.

  2. Audio
    Observation

    The instructor says, "d2d_2 equals d1d_1 minus this denominator value."

Proof dependency
Explanation

Computing d2d_2 depends on first computing d1d_1; the video explicitly reflects this dependency order in the formulas.

Call option Black-Scholes-Merton formula → Substituting into the Black-Scholes-Merton formula

Clear evidence
Shown in the video
Evidence
  1. Formula
    Observation

    In the example solution section, directly substitute the previously written formulas for C, P, d1d_1, and d2d_2.

Application
Explanation

The example applies the general Black-Scholes-Merton formula to a specific set of parameters.

Definition of the intermediate variable d1d_1 → Substituting into the Black-Scholes-Merton formula

Clear evidence
Shown in the video
Evidence
  1. Formula
    Observation

    In the example, d1d_1 is calculated first, then d2d_2.

Application
Explanation

The first step in the numerical solution of the example is substituting into the definition of d1d_1.

Definition of the intermediate variable d2d_2 → Substituting into the Black-Scholes-Merton formula

Clear evidence
Shown in the video
Evidence
  1. Formula
    Observation

    In the example, d2=d1−45d_2 = d_1 - 45% ×4/12\times \sqrt{4/12}.

Application
Explanation

The second step of the example uses the relationship between d2d_2 and d1d_1 to complete the intermediate variable calculation.

Formula for computing the intermediate variable d1d_1 → Formula for computing the intermediate variable d2d_2

Clear evidence
Shown in the video
Evidence
  1. Formula
    Observation

    d2 equals d1 minus the product of volatility and the square root of time to maturity.

Prerequisite
Explanation

Computing d2d_2 requires first finding the value of d1d_1.

Black-Scholes European call option pricing formula → Black-Scholes option pricing example

Clear evidence
Shown in the video
Evidence
  1. Formula
    Observation

    The example problem directly substitutes into the Black-Scholes formula for calculation.

Application
Explanation

The example problem demonstrates how to apply the Black-Scholes formula to solve a concrete option pricing problem.

Find an answer · 8

What is the Black-Scholes-Merton option pricing formula?

Clear evidence
Shown in the video
Evidence
  1. Audio
    Observation

    At the beginning, it directly names 'this Black-Scholes-Merton pricing formula'.

Knowledge points
  1. Introduction to the Black-Scholes-Merton pricing formula
  2. Call option Black-Scholes-Merton formula
  3. Put option Black-Scholes-Merton formula

How is the Black-Scholes formula for a call option written?

Clear evidence
Shown in the video
Evidence
  1. Formula
    Observation

    Handwrite the replication of the C formula.

Knowledge points
  1. Call option Black-Scholes-Merton formula

What is the difference between the put option formula and the call option formula?

Clear evidence
Shown in the video
Evidence
  1. Formula
    Observation

    Handwrite the replication of the P formula.

Knowledge points
  1. Put option Black-Scholes-Merton formula
  2. Incorrectly writing the put formula with the same positive arguments as the call formula.

How are d1d_1 and d2d_2 calculated, respectively?

Clear evidence
Shown in the video
Evidence
  1. Formula
    Observation

    The page gives the definition formulas for d1d_1 and d2d_2.

Knowledge points
  1. Definition of the intermediate variable d1d_1
  2. Definition of the intermediate variable d2d_2

How do we apply the formula when given S0=60S0=60, X=65X=65, r=11r=11%, σ=45σ=45%, and a maturity of 4 months?

Clear evidence
Shown in the video
Evidence
  1. Formula
    Observation

    The example solution area shows the parameter substitution process.

Knowledge points
  1. Substituting into the Black-Scholes-Merton formula
  2. Substituting numerical values for d1d_1 and d2d_2 in the example problem.

Before consulting the standard normal distribution table, should we first approximate d1 and d2?

Clear evidence
Shown in the video
Evidence
  1. Audio
    Observation

    The instructor reminds viewers to round to four decimal places when using tables.

Knowledge points
  1. Do not round decimal places before consulting the table.

How is d1 computed in the Black-Scholes formula?

Clear evidence
Shown in the video
Evidence
  1. Formula
    Observation

    The formula for computing d1d_1 and the process of substituting numerical values.

Knowledge points
  1. Formula for computing the intermediate variable d1d_1
  2. Numerical derivation of d1d_1

Do you need to compute N(d)N(d) yourself when solving option pricing problems?

Clear evidence
Shown in the video
Evidence
  1. Audio
    Observation

    The instructor mentions that N-values are usually provided.

Knowledge points
  1. Obtaining values of N(d)N(d)
Coverage and review notes

Covered · A static display of the title and full formulas, with the note that only the formulas need to be memorized.

Covered · Handwriting the call and put formulas, then summarizing the sign and term-order patterns between them.

Covered · Handwriting the definition formulas for d1d_1 and d2d_2, clarifying that d1d_1 is computed first, then d2d_2.

Covered · Entering the example: substituting parameters to compute d1d_1 and d2d_2, and reminding viewers to round before consulting tables.

Covered · It shows and explains the step-by-step numerical substitution and calculation using the Black-Scholes formula.

Covered · The screen scrolls through handwritten general formulas, and the instructor concludes that memorizing the formula makes solving problems easy.

Covered · At the end of the video, the Bilibili BiJian logo and the 'one-click triple action' prompt appear; there is no mathematical content.

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