Lognormal Distribution Assumption for Stock Prices (Solved Example)
1. Context
In this video through a solved example, we take a look at the lognormal distribution assumption that the Black Scholes model makes for stock prices. We solve for a probability in the risk neutral world and validate the answer using Binomial Trees approach. This video is an addendum to the finRGB preparation course for FRM Exam Part 1 (https://www.finRGB.com/courses/frm-part-1-online-course). The details of the readings in which this topic appears are given below:
Area | Valuation and Risk Models |
Reading | The Black Scholes Merton Model |
Reference | Chapter 23, The Black Scholes Merton Model, Official GARP Books (VRM Section, 2021). |