Eustice_Langham
Active Member
Hi, I have a question concerning the treatment of continuous dividends vs discrete dividends within the BSM option pricing model.
For continuous dividends, they will accounted for within the call formula as So * e-qt.....and conversely with the put formula as well.
However with discrete dividends, any expected dividends will be accounted for via d1, ie ln(s/k)...will be altered so that s = pv of dividends expected, taking into account the risk free rate and time.
So, why is there a different treatment, with both instances there are expectations of dividends and therefore the intrinsic value of the option?
For continuous dividends, they will accounted for within the call formula as So * e-qt.....and conversely with the put formula as well.
However with discrete dividends, any expected dividends will be accounted for via d1, ie ln(s/k)...will be altered so that s = pv of dividends expected, taking into account the risk free rate and time.
So, why is there a different treatment, with both instances there are expectations of dividends and therefore the intrinsic value of the option?
