Binomial option pricing model with dividends

Black Scholes Model: Calculator, Formula, VBA Code and More

This is actually an exercise from a course. But I don't completely understand the wording of the question. Now suppose that in 3 months, the stock pays a dividend of 10 dollars.

Construct a dynamic self-financing strategy that replicates the payoff of the put. Alright, so my question is. I don't know what happens when people know the stock is going to pay out 10 dollars of dividend in 3 months.

You could solve this by constructing a binomial tree with the stock price ex-dividend.

So, the deal is that since the dividend is known in advance, the stock price change it causes should not count as volatility. So your tree will look something like:.

As QuantK said, you need to adjust the volatility. The idea is the same as above: By posting your answer, you agree to the privacy policy and terms of service. Sign up or log in to customize your list. Stack Exchange Inbox Reputation and Badges. Questions Tags Users Badges Unanswered.

Quantitative Finance Stack Exchange is a question and answer site for finance professionals and academics. Join them; it only takes a minute: Here's how it works: Anybody can ask a question Anybody can answer The best answers are voted up and rise to the top. How to price an option on a dividend-paying stock using the binomial model? A stock is now trading at dollars. Its price over the next 6 months evolves as a two step binomial process. Part a and b are about pricing the put using risk-neutral pricing approach.

But part c states: Is it during the next period, there are 2 states: Richard 7, 2 20 QuantK 2 5. So your tree will look something like: Sign up or log in StackExchange. Sign up using Facebook.

Options Pricing: Black-Scholes Model

Sign up using Email and Password. Post as a guest Name.

Quantitative Finance Stack Exchange works best with JavaScript enabled. MathOverflow Mathematics Cross Validated stats Theoretical Computer Science Physics Chemistry Biology Computer Science Philosophy more 3. Meta Stack Exchange Stack Apps Area 51 Stack Overflow Talent.