FW: Discrete Dividends on European Option

[Ferghil O'Rourke]

 

Hi,

I’m looking to price a European option that pays discrete dividends. What’s the

best way to do this?

 

What I do right now is manually discount the pv of the dividend payment(s) from

the underlier’s price before pricing the option using EuropeanOption and

AnalyticEuropeanEngine. This gives me a price that is close, but not exact

compared to some options calculators I’ve been using. Using the above

method I get a price of 1.08, while the calculators give me 1.11.

 

I see DividendVanillaOption takes dividend dates and amounts however,

AnalyticEuropeanEngine seems not to work with it. What’s the correct

combination to price a European option with dividends?

 

Thanks,

Ferghil

[Luigi Ballabio]

On 03/17/2006 04:42:23 PM, forourke wrote:
> I'm looking to price a European option that pays discrete dividends.
>
> I see DividendVanillaOption takes dividend dates and amounts however,
> AnalyticEuropeanEngine seems not to work with it. What's the correct
> combination to price a European option with dividends?

DividendVanillaOption with AnalyticDividendEuropeanEngine (it's in
ql/PricingEngines/Vanilla in a file by the same name.)

Hope this helps,
        Luigi


----------------------------------------

Matz's Law:
        A conclusion is the place where you got tired of thinking.

[Ferghil O'Rourke]

Thanks, That's getting me a bit closer to the calculator result.

Do you know if the dividends I pass in to DividendVanillaOption should be
pre-discounted for pv (present value)?

-----Original Message-----
From: Luigi Ballabio [mailto:[hidden email]]
Sent: Friday, March 17, 2006 10:46 AM
To: forourke
Cc: [hidden email]
Subject: Re: [Quantlib-users] FW: Discrete Dividends on European Option


On 03/17/2006 04:42:23 PM, forourke wrote:
> I'm looking to price a European option that pays discrete dividends.
>
> I see DividendVanillaOption takes dividend dates and amounts however,
> AnalyticEuropeanEngine seems not to work with it. What's the correct
> combination to price a European option with dividends?

DividendVanillaOption with AnalyticDividendEuropeanEngine (it's in
ql/PricingEngines/Vanilla in a file by the same name.)

Hope this helps,
        Luigi


----------------------------------------

Matz's Law:
        A conclusion is the place where you got tired of thinking.