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Discrete dividends and the FTSE-100 index options valuation

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  • Nelson Areal
  • Artur Rodrigues

Abstract

This paper studies the effect of discrete dividends on the FTSE-100 index options valuation, following closely Harvey and Whaley's [ J. Fut. Mkts , 1992, 12 (2), 123-137] study on the S&P-100 index. To the best of our knowledge, no such study has ever been performed on FTSE-100 options, where the dividends have a discreteness pattern different from the S&P-100. Unlike the Harvey and Whaley study, both American and European options are considered, a more accurate benchmark is proposed, and a comprehensive comparison of the accuracy of a larger set of valuation methods is performed. It is shown that there are significant differences in accuracy and speed among different methods, and that, for both American and European options, a great deal of accuracy can be gained by using an approximation that takes into account the discrete nature of the FTSE-100 index option dividends.

Suggested Citation

  • Nelson Areal & Artur Rodrigues, 2014. "Discrete dividends and the FTSE-100 index options valuation," Quantitative Finance, Taylor & Francis Journals, vol. 14(10), pages 1765-1784, October.
    • Handle: RePEc:taf:quantf:v:14:y:2014:i:10:p:1765-1784
    DOI: 10.1080/14697688.2011.618457
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    References listed on IDEAS

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    1. Reimer Beneder & Ton Vorst, 2001. "Options on Dividend Paying Stocks," World Scientific Book Chapters, in: Jiongmin Yong (ed.), Recent Developments In Mathematical Finance, chapter 17, pages 204-217, World Scientific Publishing Co. Pte. Ltd..
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    Cited by:

    1. Ma, Jingtang & Fan, Jiacheng, 2016. "Convergence rates of recombining trees for pricing options on stocks under GBM and regime-switching models with known cash dividends," The North American Journal of Economics and Finance, Elsevier, vol. 37(C), pages 128-147.

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