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The Journal of Derivatives
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The Journal of Derivatives

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Primary Article

Stocks Paying Discrete Dividends

Modeling and Option Pricing

Ralf Korn and L. C. G. Rogers
The Journal of Derivatives Winter 2005, 13 (2) 44-48; DOI: https://doi.org/10.3905/jod.2005.605354
Ralf Korn
Fachbereich Mathematik, Universität Kaiserslautern and Fraunhofer Institute ITWM, Kaiserslautern, Germany.
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L. C. G. Rogers
Statistical Laboratory, Cambridge, Great Britain.
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Abstract

In the Black–Scholes model, any dividends on stocks are paid continuously, but in reality dividends are always paid discretely, often after some announcement of the amount of the dividend. It is not entirely clear how such discrete dividends are to be handled; simple perturbations of the Black–Scholes model often fall into contradictions. The authors' approach here is to recognize the stock price as the net present value of all future dividends, and to model the (discrete) dividend process directly. The stock price process is then deduced and various option–pricing formulae derived. The Black–Scholes model with continuous dividend payments results as a limit as the time between dividend payments goes to zero.

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The Journal of Derivatives
Vol. 13, Issue 2
Winter 2005
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Stocks Paying Discrete Dividends
Ralf Korn, L. C. G. Rogers
The Journal of Derivatives Nov 2005, 13 (2) 44-48; DOI: 10.3905/jod.2005.605354

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Stocks Paying Discrete Dividends
Ralf Korn, L. C. G. Rogers
The Journal of Derivatives Nov 2005, 13 (2) 44-48; DOI: 10.3905/jod.2005.605354
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