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Discrete dividends after maturity adjust the stock and strike prices

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  • Kevin W. Lu

Abstract

The standard method to price European calls on a discrete dividend-paying stock is to subtract the present value of the dividends from the initial stock price in the Black-Scholes formula. However, when there are dividends after maturity, this is inconsistent with the model. Within the escrowed dividend model, we highlight an extension of the Black-Scholes formula in which those dividends after maturity adjust both the stock price and strike price, allowing for calls over all maturities to be priced in a model-consistent way. As a related application to American calls with a single dividend before maturity, we establish a neglected case where it is always optimal to early exercise and derive an extension of the Roll-Geske-Whaley formula when there are dividends after maturity, including fully characterising the optimal exercise policy.

Suggested Citation

  • Kevin W. Lu, 2026. "Discrete dividends after maturity adjust the stock and strike prices," Papers 2607.24973, arXiv.org.
    • Handle: RePEc:arx:papers:2607.24973
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    File URL: https://arxiv.org/pdf/2607.24973
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