Posted by
Bai, Yun on
URL: http://quantlib.414.s1.nabble.com/Can-CRR-model-valuate-options-on-stocks-with-discrete-dividend-schedule-tp595p598.html
It will be great to work on it together. I have worked with Mike and
come close to an implementation.
Following known dollar dividend model, chp 18.3 of Hull's 5th edition,
we tried two designs. Please feel free to advice on our methodolody and
understanding of QuantLib's framework.
A simple way to to implement discrete dividend for Tree models is to
separate underlying process into two parts:
- An modified smooth process similar to input process, stripped of pv of
future divdends.
- A scheduled dividendcash flow.
During backward induction of option value, we will need the following
information to come up with intrinsic and hence option value at each
node.
- Value of option on previous level of nodes.
- Underlying value from modified smooth process.
- Dividend schedule
Design option 1: Have a payoff object that encloses all logic of
dividend adjustment while leaving the dividend stripped underly diffuse
with BinomialVanillaEngine. This sounds the simplest solution. However,
this requires extending payoff interface to provide T on top of S, which
requires more changes to the framework.
Design option 2: create discretizedvanilaoption and
binomialdividenvanilaengine, to mirror discretizedoption and
binomialengine pair.
Following option 2, we are getting close to an implementation.
However, option2 requires duplication of much of binomialengine code, to
circumvent restriction of vanilaoption's argument type in
binomialvanilaengine template.
Please advice on how would you implement this feature without
duplication of code.
Thanks
-Yun
-----Original Message-----
From: Pedro Romano [mailto:
[hidden email]]
Sent: Saturday, February 10, 2007 10:05 AM
To: Luigi Ballabio; Bai, Yun
Cc:
[hidden email]
Subject: Re: Can CRR model valuate options on stocks with discrete
dividend schedule?
Luigi, Yun,
I also need CRR binomial-tree engine with discrete dividends and will
be implementing this functionality in the short term. Any chance of
cooperation on this Yun?
Luigi: since I am still not familiar with the code do you have any
tips on how to go about implementing this? Any other code already
implemented I can base it on? Thanks.
Best regards,
--Pedro.
Luigi Ballabio wrote:
> On Thu, 2007-02-08 at 23:00 -0600, Bai, Yun wrote:
>> Following examples\EquityOption\EquityOption.cpp, I tried to value an
>> american option on underly that has discrete dividend schedule by
simply
>> changing the EuropeanOption to DividendVanillaOption:
>
>> However during runtime, exceptions pops up from
>> DividendVanillaOption::setupArguments, telling me "wrong engine
type".
>> Can someone tell me whether DividendVanillaOption can be used along
with
>> CRR model binomial engine?
>
> Yun,
> no, unfortunately it can't. The CRR engine (or any binomial-tree
> engine) cannot yet manage discrete dividends. Would you be willing to
> contribute a patch?
>
> Later,
> Luigi
>
>
> ----------------------------------------
>
> Everything that can be invented has been invented.
> -- Charles Duell, Director of U.S. Patent Office, 1899
>
>
>
>
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