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Ficsor01
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Joined: June 9th, 2017, 1:04 pm

Pricing Dividend Options

July 13th, 2021, 9:55 am

The literature on modelling and pricing dividend options appears to be very sparse. I am looking to price an option on a portfolio of dividends from an index. In this case can anyone suggest a way to calculate this option price as an asian option and using the Black-Scholes formula if we assume that the sum of the dividends that will be paid out by expiry follow a lognormal distribution with no drift. 
 
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Alan
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Re: Pricing Dividend Options

July 13th, 2021, 3:36 pm

Please post the exact contract terms. 
 
Ficsor01
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Joined: June 9th, 2017, 1:04 pm

Re: Pricing Dividend Options

July 14th, 2021, 2:51 pm

Hi Alan, 

No exact contract terms. I am trying get the SDE for this in general terms. So the exercise suggests that (i) I use use a trick similar to when deriving the price of the option for an Asian option (not sure what is the "trick") (ii) I also need to get the SDE assuming constant vol. 
 
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Alan
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Re: Pricing Dividend Options

July 14th, 2021, 3:22 pm

Hi,

If you can't define the contract, you can't value it. I'm certainly not going to guess at the terms. Define the "general" terms.

Also, it sounds like you have read somebody's approach somewhere but don't understand it. That's fine, but the best way to proceed is to link to what you have read, explain what you understand and what you don't, and ask your questions. 

At this point, you have a very poorly constructed request for help that I don't think is going to go anywhere ...

 
 
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jherekhealy
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Re: Pricing Dividend Options

July 23rd, 2021, 2:59 pm

The typical kind of contracts are options on dividend futures.
https://www.eurex.com/ex-en/markets/did ... ons-946274

In this case the underlying is simply a future, and there is no need for an assumption of the individual future dividends, unless we price the front month.

For the front month, the theoretical vol should indeed decrease close to expiry (since most of the dividends are known) and using some sort of Asian approx may make sense. That being said, if you hedge your option with futures, using a simple term structure of vols would likely be good enough.