A closed-form formula for unprotected American call options on assets paying discrete known dividends

Liesbeth Thomassen and Martine van Wouwe

Working Papers from University of Antwerp, Faculty of Business and Economics

Abstract: In general, American options cannot be valued by closed-form formulas. There is however an exception within the setting of dividendpaying assets. It is known that American call options will be exercised early, only at a time just prior to an ex-dividend date. In extending the Roll-Geske-Whaley model and in using the theory of the n-fold compound options, such closed-form formulas are derived in case the asset pays n dividends with n > 2. Moreover a sensitivity analysis for American call options will be performed. Finally some numerical examples are included.

Pages: 11 pages
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