Abstract
The main purpose of this chapter is to present the American option pricing model on stock with dividend payment and without dividend payment. A Microsoft Excel program for evaluating this American option pricing model is also presented.
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It is possible that the dividend payment is so large that early exercise prior to the dividend payment is completely precluded. For example, consider the case where X = 50, S = 40, D = 1, t = 0. 25 and r = 0. 10. Early exercise is precluded if r, = 0. 25 − ln[1 − l ∕ (50 − 40)] ∕ 0. 10 = − 0. 7031. Because the value is negative, the implication is that there is no time during the current dividend period (i.e., from 0 to t) where it will not pay the American put option holder to wait until the dividend is paid to exercise his option.
References
Stoll, H. R. 1969. “s” Journal of Finance 24, 801–824.
Whaley, Robert E. 1981. “On the valuation of American call options on stocks with known dividends.” Journal of Financial Economics 9, 207–211.
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© 2010 Springer Science+Business Media, LLC
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Lee, C.F., Lee, A.C., Lee, J. (2010). Bivariate Option Pricing Models. In: Lee, CF., Lee, A.C., Lee, J. (eds) Handbook of Quantitative Finance and Risk Management. Springer, Boston, MA. https://doi.org/10.1007/978-0-387-77117-5_28
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DOI: https://doi.org/10.1007/978-0-387-77117-5_28
Publisher Name: Springer, Boston, MA
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