Re: Quantlib-dev digest, Vol 1 #441 - 2 msgs

[Theo Boafo]

Hi Luigi,

 

1) Discrete Dividends in Binomial tree

Please see below e-mail from Professor Hull who wrote the Hull/White book on Options, Futures and other Derivatives on his views below on how discrete dividends should be handled.  This means that what we had previously during early days of development of Convertible Bonds engine was correct.

My preferred approach is to model the stock price less the PV of the dividends and then add dividends in. This is described in my book. It has the advantage of being consistent with the way European options are valued using Black-Scholes and is widely used in practice.

John Hull

2)  Monte Carlo Simulation of Hull White process for the MBS pricing engine, I have a few ideas I would experiment with till your contribution arrives.

Regards

 

Theo

 

[Luigi Ballabio]

On 04/20/2006 10:54:02 PM, [hidden email] wrote:

>
>> My preferred approach  is to model the stock price less the PV of  
>> the dividends and then add dividends  in. This is described in my  
>> book. It has the advantage of being consistent with  the way  
>> European options are valued using Black-Scholes and is widely used  
>> in  practice.
>> John  Hull
>
> This means that what we had previously during early days of  
> development of Convertible Bonds engine was correct.

Theo,
        apologies for the delay. Yes, the idea was correct---but I  
think the implementation was not. However, go ahead and draft an  
implementation.

Later,
        Luigi


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