## oBSdd( ) Example 2 - Equity Put Option with Discrete Dividends

Description

Consider a European put option on a stock that has a current spot price of \$80, a volatility of 25% and pays a dividend of \$5.00 on 1 October 2002. The option has a strike price of \$70 and matures on 1 December 2002. The risk-free interest rate is 5% (on an actual/365 basis). What is the value of this option at 1 June 2002?

Function Specification

=oBSdd(2, "1/6/02", "1/12/02", 80, 70, 0.25, D4:F4, D5:E5, 0)

It is assumed the cell references for the zero curve and dividend schedule contain the appropriate input values.

Solution

The continuous equivalent of the flat actual/365 zero curve is calculated as follows: S*, the spot price less the present value of the future dividends paid during the life of the option, is calculated as follows:

S* = 80 - 4.92 = 75.08

Referring to the equations for d1 and d2 (see model definition), if S* = 75.08, X = 70, r = 0.0488, vol = 0.25 and T = 0.5014 (183/365 days), d1 = 0.6225 and d2 -0.4455.

As iPC = 1 (call), N(d1) is 0.2668 and N(d2) is 0.3280 (see oCumNorm( ) function), the Black Scholes equation becomes: Greeks

The following Greeks are computed using the formulas specified in oBSdd() Model Greeks:

-0.266795

0.024729

-3.263208

17.472822

###### Rho

-11.232359 Copyright 2013 Hedgebook Ltd.