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Closed-form valuation of American call options on stocks paying multiple dividends |
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| Authors: | D. Cassimon P.J. Engelen L. Thomassen M. Van Wouwe |
| Affiliation: | aUniversity of Antwerp, Institute for Development Policy and Management, Venusstraat 35, B-2000 Antwerp, Belgium;bUtrecht University, Utrecht School of Economics, Vredenburg 138, 3511BG Utrecht, The Netherlands;cTjalling C. Koopmans Institute, Vredenburg 138, 3511BG Utrecht, The Netherlands;dUniversity of Antwerp, Department of Mathematics, Statistics and Actuarial Sciences, Prinsstraat 13, B-2000 Antwerp, Belgium |
| Abstract: | An American call option on a stock paying a single known dividend can be valued using the Roll–Geske–Whaley formula. This paper extends the Roll–Geske–Whaley model to the n dividends case by using the generalized n-fold compound option model. In this way this paper offers a closed-form solution for American options on stocks paying n known discrete dividends. Moreover, the model also offers the critical values of the early exercise boundaries at each ex-dividend date instant, making it easy to define an early exercise strategy. Numerical examples are included to illustrate this approach. |
| Keywords: | American call option Closed-form Multiple dividends n-fold compound option model |
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