| When asked how to value a stock option without | | | | which generally overprices call options;third, Haug |
| dividend or with continuous dividend, many people | | | | & Haug volatility adjustment model, which is more |
| would refer to Black Scholes formula, but how to price | | | | sophisticated than Chriss model and takes into account |
| an option with discrete dividend then? certainly Black | | | | the timing of the dividend, unfortunately, the authors |
| Scholes model can't be used directly since one of its | | | | show this method performs particularly poorly for |
| assumptions is continuous payout. Below is a list of | | | | multiple dividends stock option;fourth, Bos volatility |
| summary to deal with the problem:first, Escrowed | | | | adjustment model, a even more sophiscated model |
| dividend model, which is the simplest and the least | | | | than Haug & Haug, but still, it performs poorly for |
| accurate way as a result. The basic idea of Escrowed | | | | large dividends or long term options;fifth, Lattice |
| dividend model is to adjust the current stock price by | | | | method, for example, non-recombining binomial tree |
| deducting the present value of future dividends, and | | | | introduced in the bible book Options, Futures, and Other |
| plug in the replaced stock price to Black Scholes | | | | Derivatives, we all know it is time-consuming;finally, |
| formula;second, Chriss volatility adjustment model, | | | | Haug, Haug and Lewis method introduced in the |
| besides replacing current stock price, this model | | | | above-mentioned paper, the basic idea is to calculate |
| adjusts volatility as well because the Escrowed | | | | first the ex-dividend option price by Black Scholes |
| dividend model alone decreases the absolute price | | | | model, then discount back the ex-dividend value under |
| standard deviation, hence underestimates an option's | | | | equivalent martingale measure. The authors |
| value. However, Chriss model yields too high volatility if | | | | demonstrate the high accuracy of their model with |
| the dividend is paid out early in the option's lifetime, | | | | several examples afterwards. |