Serving the Quantitative Finance Community

 
User avatar
billyquant24
Topic Author
Posts: 0
Joined: September 18th, 2011, 6:26 pm

Finite Difference American Put Discrete Dividend

February 9th, 2012, 5:19 am

Is it possible value an american put using finite difference method when there are discrete dividends. If so, does anyone where I can the Matlab code for it?
 
User avatar
Darou
Posts: 2
Joined: August 6th, 2002, 11:03 am

Finite Difference American Put Discrete Dividend

February 9th, 2012, 2:27 pm

As for Monte Carlo, this is just a drop in the stock price S:S_(t+) = S(t_-)-D.and you have to ensure that the option price V(S_(t+)) = V(S_(t-)) remains the same. You can do that by shifting your Grid or (e.g. if D depends somewhat on S) by interpolation.I hope that helps!Darou
Last edited by Darou on February 8th, 2012, 11:00 pm, edited 1 time in total.
 
User avatar
billyquant24
Topic Author
Posts: 0
Joined: September 18th, 2011, 6:26 pm

Finite Difference American Put Discrete Dividend

February 15th, 2012, 5:53 pm

thanks for ur response,if the dividend date t* either lies on a grid point, or in between two time grid points, i am not sure what grid point should be treated as before dividend payment, and what should be after. could u clarify this for me?
 
User avatar
billyquant24
Topic Author
Posts: 0
Joined: September 18th, 2011, 6:26 pm

Finite Difference American Put Discrete Dividend

February 15th, 2012, 8:35 pm

never mind, problem sovled
 
User avatar
Rufus
Posts: 4
Joined: January 18th, 2002, 5:24 pm

Finite Difference American Put Discrete Dividend

February 16th, 2012, 12:12 pm

the Haug Haug Lewis (2003) paper has some benchmark results that I used for checking my fd scheme was doing the right thing for american puts + discrete divs. I found it best to add an extra timestep for each dividend.
Last edited by Rufus on February 15th, 2012, 11:00 pm, edited 1 time in total.
 
User avatar
jfuqua
Posts: 6
Joined: July 26th, 2002, 11:41 am

Finite Difference American Put Discrete Dividend

February 20th, 2012, 3:03 pm

You might want to think about building the FD for both fixed and variable dividends. A fixed deterministic and stochastic variable dividend. Of course you can also include proportional as a third type.
 
User avatar
Tene
Posts: 1
Joined: August 30th, 2005, 2:30 am

Finite Difference American Put Discrete Dividend

February 22nd, 2012, 6:33 pm

What would be a good model for stochastic variable dividend?Any good references on this topic?
 
User avatar
Cuchulainn
Posts: 20253
Joined: July 16th, 2004, 7:38 am
Location: 20, 000

Finite Difference American Put Discrete Dividend

February 22nd, 2012, 7:44 pm

This is sto div using a pde approach (ADE versus ADI). There was a discussion on this topic here that later drifted into other stuff (that's the way it goes here).here
Last edited by Cuchulainn on February 21st, 2012, 11:00 pm, edited 1 time in total.