An efficient binomial approach to the pricing of options on stocks with cash dividends

Martina Nardon () and Paolo Pianca

No 178, Working Papers from Department of Applied Mathematics, Università Ca' Foscari Venezia

Abstract: In this contribution, we consider options written on stocks which pay cash dividends. Dividend payments have an effect on the value of options: high dividends imply lower call premia and higher put premia. While exact solutions to problems of evaluating both European and American call options and European put options are available in the literature, for American-style put options early exercise may be optimal at any time prior to expiration even in the absence of dividends. In this case numerical techniques, such as lattice approaches, are required. Discrete dividends produce a shift in the tree; as a result, the tree is no longer reconnecting beyond any dividend date. Methods based on non-recombining trees give consistent results, but they are computationally expensive. We analyze binomial algorithms and performed some empirical experiments.

Keywords: Options on stocks; discrete dividends; binomial lattices (search for similar items in EconPapers)
JEL-codes: C63 G13 (search for similar items in EconPapers)
Pages: 14 pages
Date: 2008-11
New Economics Papers: this item is included in nep-cfn
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://virgo.unive.it/wpideas/storage/2008wp178.pdf First version, 2008 (application/pdf)
Our link check indicates that this URL is bad, the error code is: 500 Can't connect to virgo.unive.it:80 (A connection attempt failed because the connected party did not properly respond after a period of time, or established connection failed because connected host has failed to respond.)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:vnm:wpaper:178

Access Statistics for this paper

More papers in Working Papers from Department of Applied Mathematics, Università Ca' Foscari Venezia Contact information at EDIRC.
Bibliographic data for series maintained by Daria Arkhipova ().