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Options on Dividend Paying Stocks

In: Recent Developments In Mathematical Finance

Author

Listed:
  • Reimer Beneder

    (Econometric Institute, Erasmus University Rotterdam, P.O. Box 1738, 3000 DR Rotterdam, The Netherlands)

  • Ton Vorst

    (Econometric Institute, Erasmus University Rotterdam, P.O. Box 1738, 3000 DR Rotterdam, The Netherlands)

Abstract

In this paper we describe arbitrage opportunities that result from applying a standard price methodology for options on stocks paying discrete dividends. The main reason is the reduction of volatility that comes with the use of clean stock prices in calculating option prices. We propose a method that adjusts the volatility. The accuracy of this method is assessed by comparing the valuation of options with those generated by Monte Carlo simulation. Overall, the volatility adjustment leads to a significant increase in accuracy compared with the application of the straightforward Black-Scholes formula.

Suggested Citation

  • Reimer Beneder & Ton Vorst, 2001. "Options on Dividend Paying Stocks," World Scientific Book Chapters, in: Jiongmin Yong (ed.), Recent Developments In Mathematical Finance, chapter 17, pages 204-217, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789812799579_0017
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    Cited by:

    1. Alexander Buryak & Ivan Guo, 2014. "New analytic approach to address Put - Call parity violation due to discrete dividends," Papers 1407.7328, arXiv.org.
    2. Nelson Areal & Artur Rodrigues, 2014. "Discrete dividends and the FTSE-100 index options valuation," Quantitative Finance, Taylor & Francis Journals, vol. 14(10), pages 1765-1784, October.
    3. German Bernhart & Jan-Frederik Mai, 2016. "On the impact of a scrip dividend on an equity forward," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 3(04), pages 1-16, December.
    4. D. Jason Gibson & Aaron Wingo, 2016. "Pricing barrier options with discrete dividends," Papers 1601.00940, arXiv.org.
    5. Paolo Angelis & Roberto Marchis & Antonio L. Martire & Emilio Russo, 2022. "A flexible lattice framework for valuing options on assets paying discrete dividends and variable annuities embedding GMWB riders," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 45(1), pages 415-446, June.

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