Economics, Econometrics and Finance
8 years ago

New option pricing model corrects biases in Black and Scholes formula.

SSRN Electronic Journal
An Alternative Approach to Dividend Adjustments in Option Pricing Models
In-Moo Kim

Paper Summary

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The article explores a new way to value options when the underlying asset pays dividends. They suggest an alternative method to adjust option pricing formulas for dividends, comparing it to traditional approaches for European options. For American options, this new approach extends existing models and corrects biases in the Black and Scholes formula.