{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

MGTC71-11 - European Options on Stocks Providing a Dividend...

Info icon This preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
1 MGTC71-Lecture 11 Options on Stock Indices, Currencies Ata Mazaheri 2 European Options on Stocks Providing a Dividend Yield We get the same probability distribution for the stock price at time T in each of the following cases: 1. The stock starts at price S 0 and provides a dividend yield = q 2. The stock starts at price S 0 e q T and provides no income 3 European Options on Stocks Providing Dividend Yield (Cont’d) We can value European options by reducing the stock price to S 0 e q T and then behaving as though there is no dividend 4 Extension of Chapter 9 Results rT qT Ke e S c - - - 0 Lower Bound for calls: Lower Bound for puts qT rT e S Ke p - - - 0 Put Call Parity qT rT e S p Ke c - - + = + 0 5 Extension of BSM Results T T q r K S d T T q r K S d d N e S d N Ke p d N Ke d N e S c qT rT rT qT σ σ - - + = σ σ + - + = - - - = - = - - - - ) 2 / 2 ( ) / ln( ) 2 / 2 ( ) / ln( ) ( ) ( ) ( ) ( 0 2 0 1 1 0 2 2 1 0 where 6 The Binomial Model S 0 u ƒ u S 0 d ƒ d S 0 ƒ p (1 – p ) f=e -rT [ pf u + (1 -p ) f d ]
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
7 The Binomial Model (Cont’d) In a risk-neutral world the stock price grows at r-q rather than at r when there is a dividend yield at rate q The probability, p , of an up movement must therefore satisfy pS 0 u+ ( 1-p ) S 0 d=S 0 e ( r-q ) T so that p e d u d r q T = - - - ( ) 8
Image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern