Posted by
Luigi Ballabio on
URL: http://quantlib.414.s1.nabble.com/Question-on-convertible-bond-with-discretesdividends-tp6450p6458.html
On Thu, 2009-11-26 at 10:20 +0000, benoit houzelle wrote:
> I have a question about discretes dividends in the binomial
> convertible bond pricing engine It seems that
>
> The grid is computed with spot - sum{ NPV(dividends) }
> After in the backward computation, we add in the grid the
> dividends (just dividend not the NPV of dividend)
>
> --> in the last value of grid (ie grid[0][0]) the value is
> spot - Sum(NpV(Div)) + Sum(Div) != Spot
No, it doesn't work as that. The dividends are added (non discounted) at
the nodes corresponding to their payment date. As we work backwards on
the tree, the values at the nodes are discounted during roll-back so
that we have spot - Sum(NpV(Div)) + Sum(Npv(Div)) at the first node.
Algorithmically, this is different than what Hull does (i.e., add at
each node the discounted value of the dividends---note, though, that the
value is discounted to the time of each node, not to t=0.) But in the
end, it is equivalent. We just discount while combining the nodes
rather than beforehand.
Luigi
--
If I do not want others to quote me, I do not speak.
-- Phil Wayne
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