ISDA language - equity derivatives dividends

GWB · May 10th, 2007, 5:02 pm

Could anyone explain what the ISDA standard methods are regarding the dividends paid during the ternor of a stock put option? regular dividend - should the paid dividend be simply pass to the option buyer, or , should the strike/notional be adjustedother dividends, e.g. exceed dividend, one time dividend - same question as above.

jfl · May 11th, 2007, 10:11 am

I don't understand your question. I understand ISDA terms.Options (certainly vanilla ones) do not include dividend payments.Are you referring to the dividends associated with a hedge via a position in the option underlying?

GWB · May 11th, 2007, 5:31 pm

Thanks.Let me clarify. An option under ISDA standard terms will ignore any dividend paid during the ternor. e.g. if a investor buys an Ford call option with strike = 6 and expiration date = 01/08. and if F pays any dividend between the purchase day and the expiration day, neither the dividend will be passed to the investor nor the strike will be adjusted. However, if the investor want to be dividend-protected, he needs to add special terms on top of the ISDA language in the contract.Do I understand correctly?