if d is the price of a european digital put with expiry t and strike
K, then d / P(0,t) is the probability for S(t) < K (in the t-forward
pricing measure). I think.
Best regards
Peter
On 28 October 2015 at 08:33, Jaroslav Tupý <[hidden email]> wrote:
If you take the inflated price of a digital option and if you use a call spread pricing as a proxy for this price you are able to include the observed market smile in your probability calculation.
If you just take the probablility from the Black formula as suggested in the thread you mentioned, you wont be able to fully include this smile.
And as your initial thread also mentioned: If your are looking for a real world probability you would have to estimate the volatility yourself from maybe historical prices. Then you would likely again use the formula given in the thread.
2015-10-28 8:33 GMT+01:00 Jaroslav Tupý <[hidden email]>:
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