Options on Dividend Paying Stocks

Reimer Beneder and Ton Vorst ()
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Reimer Beneder: Econometric Institute, Erasmus University Rotterdam, P.O. Box 1738, 3000 DR Rotterdam, The Netherlands

Chapter 17 in Recent Developments in Mathematical Finance, 2001, pp 204-217 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractIn 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.

Keywords: Proceedings; Conference; Mathematical Finance; Shanghai (China) (search for similar items in EconPapers)
Date: 2001
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