Extracting information on implied volatilities and discrete dividends from American options prices
AbstractThis contribution deals with options on assets which pay cash dividends. Pricing methods which consider discrete dividends are usually computationally expensive; a first purpose of this paper is to study efficient and accurate numerical procedures which yield consistent prices for both European and American options in the presence of discrete dividends. We then analyze some methodologies to extract information on volatilities and dividends from observable option prices. Implied dividends can also be computed using a modified version of the well known put-call parity relationship. This technique is straightforward, nevertheless, its use is limited to European options and, when dealing with equities, most traded options are of American-type. As an alternative, numerical inversion of pricing methods can be used. We apply different procedures to obtain implied volatilities and dividends of listed stocks of the Italian Derivatives Market.
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Bibliographic InfoPaper provided by Department of Economics, University of Venice "Ca' Foscari" in its series Working Papers with number 2012_25.
Date of creation: 2012
Date of revision:
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Options on stocks; discrete dividends; lattice methods; implied volatilities; implied dividends.;
Find related papers by JEL classification:
- C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-11-17 (All new papers)
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