File Name: Exotic Options – Uneven Dividend Payments
Location: Modeling Toolkit | Exotic Options | Uneven Dividends
Brief Description: Computes the value of plain vanilla call and put options when the dividend stream of the underlying asset comes in uneven payments over time
Requirements: Modeling Toolkit
Modeling Toolkit Functions Used: MTGeneralizedBlackScholesCallCashDividends, MTGeneralizedBlackScholesPutCashDividends, MTGeneralizedBlackScholesCall, MTGeneralizedBlackScholesPut
Sometimes dividends are paid in various lump sums, and sometimes these values are not consistent throughout the life of the option. Accounting for the average dividend yield and not the uneven cash flows will yield incorrect valuations in the Black-Scholes paradigm. See Figure 78.1.
Figure 78.1: Options with uneven dividend payments