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Pricing barrier options with discrete dividends

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  • D. Jason Gibson
  • Aaron Wingo

Abstract

The presence of discrete dividends complicates the derivation and form of pricing formulas even for vanilla options. Existing analytic, numerical, and theoretical approximations provide results of varying quality and performance. Here, we compare the analytic approach, developed and effective for European puts and calls, of Buryak and Guo with the formulas, designed in the context of barrier option pricing, of Dai and Chiu.

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  • D. Jason Gibson & Aaron Wingo, 2016. "Pricing barrier options with discrete dividends," Papers 1601.00940, arXiv.org.
    • Handle: RePEc:arx:papers:1601.00940
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    1. Robert C. Merton, 2005. "Theory of rational option pricing," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 8, pages 229-288, World Scientific Publishing Co. Pte. Ltd..
    2. 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..
    3. Alexander Buryak & Ivan Guo, 2012. "New Analytic Approach to Address Put--Call Parity Violation due to Discrete Dividends," Applied Mathematical Finance, Taylor & Francis Journals, vol. 19(1), pages 37-58, May.
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