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oBIN2( ) - Dividends and Carry Definitions

The variable step binomial option pricing model is designed for two broad groups of options:

  • Bermudan options on stocks, futures, currencies, and commodities.
  • European, Bermudan, and American options on stocks with discrete dividends.

 

1. Bermudan options on stocks, futures, currencies, and commodities.

For these option types, the 'dividend' argument in the oBIN2( ) function takes the value of the net cost of carry. This is usually entered as a single value, expressed as a decimal. The appropriate definition for the net cost of carry depends on the nature of the asset underlying the option:

 

Underlying Asset

Net Cost of Carry

.

Stock - no dividend

b = r

Stock - continuous dividend yield

b = r - q

Futures

b = 0

Currencies

b = r - rf

Commodities

b = r - c

 

 

Where,

b = net cost of carry.

 

r = riskless interest rate.

 

rf = foreign riskless interest rate.

 

q = continuous dividend yield.

 

c = continuous net convenience yield (convenience yield less storage costs) of the underlying asset

 

 

 

 

2. European, Bermudan, and American options on stocks with discrete dividends.

The discrete dividend schedule is entered as a two column vector. The first column lists the dividend payment dates and the second column lists the dividend amount that will be paid on each nominated date.

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