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Sir in your lectures for option pricing and delta hedges , you had said that delta (which is change in option pricing to market price) is basically n(d1) ,1. I would first like to ask you that what n(d1) and n(d2) represent ? as far as i know they represent volatility and 2. Could explain me why n(d1) is infact delta.
thanks alot!
It is impossible to say precisely what N(d1) and N(d2) are without proving the formulae, which I have certainly no intention of doing and cannot be asked for in the exam 🙂 (And for that reason also you cannot be asked what they represent). They are probabilities, and as such are certainly related to the volatility (which itself is the standard deviation).
As regards the reason for N(d1) being delta, I do explain this in the lectures. In the very short term, as the price of the share changes (as it will from day to day), then the option price will also change by the share price x N(d1). This is because if you look at the formula, if you ignore the last term in it then an increase of (say) $1 in the share price will result in an increase of $1 x N(d1) in the option price. The reason I say about ignoring the last term in the formula is that in the very short term, the last term will not change.
In the longer term the last term will obviously change (because all of the factors in it can change) and that is why in practice people creating a delta hedge need to keep revising the hedge (and why to help them there are the other Greeks).
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