Efficient Pricing of Derivatives on Assets with Discrete Dividends

Vellekoop, M.H. and Nieuwenhuis, J.W. (2006) Efficient Pricing of Derivatives on Assets with Discrete Dividends. Applied Mathematical Finance, 13 (3). pp. 265-284. ISSN 1350-486X

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Abstract:	It is argued that due to inconsistencies in existing methods to approximate the prices of equity options on assets which pay out fixed cash dividends at future dates, a new approach to this problem may be useful. Logically consistent methods which are guaranteed to exclude arbitrage exist, but they are not very popular in practice due to their computational complexity. An algorithm is defined which is easy to understand, computationally efficient, and which guarantees to generate prices which exclude arbitrage possibilitites. It is shown that for the method to work a mild uniform convergence condition must be satisfied and this condition is indeed satisfied for standard European and American options. Numerical results testify to the accuracy and flexibility of the method.
Item Type:	Article
Copyright:	Taylor & Francis
Research Group:	Stochastic Systems and Signals (SST)
Link to this item:	http://purl.utwente.nl/publications/58556
Official URL:	http://dx.doi.org/10.1080/13504860600563077
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