Sponsored by
Westpac
Pricing of Equity Options with discrete dividends:
Overview and recent results
Presented by:
Alex Buryak, National Australia Bank
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Time: |
5:15-7:00 pm |
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Date: |
Wednesday 13 April 2011 |
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Venue: |
Westpac Conference Centre, Plaza Level, |
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Abstract
The issue of pricing of vanilla European Put and Call equity options was in the focus of attention since early days of quantitative finance. Pioneering work of Black-Scholes (1973) provided a long awaited simple benchmark solution of this problem for equities without discrete dividends.
One of the logical next steps was finding a similar form approximation for pricing of options with large discrete dividends. This issue became popular since early 2000's with a few versions of different approaches reported during the last 10 years. Moreover, it has been claimed that at least some of the resulting expressions represent high-quality approximations which closely match results obtained by the use of numerics.
In this talk I review, on the one hand, these previously suggested Black-Scholes type approximations and, on the other hand, different versions of the corresponding numerical schemes. Unexpectedly we often observe substantial deviations between the analytical and numerical results which are especially pronounced for European Puts. Moreover, it can be shown that any Black-Scholes type approximation which adjusts Put parameters identically to Call parameters has an inherent problem of failing to detect a little known Put-Call Parity violation phenomenon. Finally, I derive a new closed form analytic approximation which is in a better agreement with the corresponding numerical results in comparison with any of the previously known analytic approaches for European Calls and Puts with large discrete dividends.
Applications of these interesting results are also briefly discussed.
About the speaker
Alex Buryak is a Senior Quantitative Analyst at the National Australia Bank working within Market Risk.