Search arXiv⌕ Search
Home/Archive/arXiv

arXiv · 2607.24973

Discrete dividends after maturity adjust the stock and strike prices

Kevin W. Lu
View original source ↗Read source document ↗Export metadata ↓

Abstract

The standard method to price European calls on a discrete dividend-paying stock is to subtract the present value of the dividends from the initial stock price in the Black-Scholes formula. However, when there are dividends after maturity, this is inconsistent with the model. Within the escrowed dividend model, we highlight an extension of the Black-Scholes formula in which those dividends after maturity adjust both the stock price and strike price, allowing for calls over all maturities to be priced in a model-consistent way. As a related application to American calls with a single dividend before maturity, we establish a neglected case where it is always optimal to early exercise and derive an extension of the Roll-Geske-Whaley formula when there are dividends after maturity, including fully characterising the optimal exercise policy.

Explore related subjects

q-fin.MF

Keep this discovery

Explore connections, maps & timelines

BibTeXRIS

Kevin W. Lu. 2026-07-27. Discrete dividends after maturity adjust the stock and strike prices. https://arxiv.org/abs/2607.24973

Cite the original work for its findings. Save a collection to share your selection of sources.

KEEP EXPLORING

Related papers

arXiv2026

Efficient simulation of a new class of Volterra-type SDEs

We propose a new theoretical framework that exploits convolution kernels to transform a Volterra-type path-dependent (non-Markovian) stochastic process into a standard (Markovian) diffusion process. The transformation is reversible. We discuss existence and path-wise regularity of solutions for our class of stochastic differential equations. In the fractional-kernel case, when $H\in(0,\frac12)$, where $H$ is the Hurst coefficient, we propose a numerical simulation scheme which exhibits a strong convergence rate of order $1/2$, improving upon the rate typically obtained by Euler schemes for stochastic Volterra equations with comparably rough trajectories. This improvement is made possible by the distinctive structure of the proposed class, characterized by a non-Markovian process whose coefficients are driven by an associated Markovian one.

q-fin.MF↗
arXiv2026

The skew Brownian motion should not be used as a risk-neutral returns process: a well-posed skew-normal alternative

Return models for risk-neutral financial valuation based on skew Brownian motions (SBMs) have been introduced about twenty years ago, and have recently enjoying growing popularity. Unfortunately, the story behind their development is one of mistakes and erroneous interpretations, beginning from the foundational misrepresentations that the prevalent financial model is based on the Itô-McKean SBM -- which, in fact, it is not. Besides, and more seriously, the clarification of \cite{rossello2012arbitrage} that price models with a local time in their returns, such as the SBM, are arbitrageable has been, by and large, ignored. In this paper, we try to clear the field from the confusions and misconceptions lurking in the standing option pricing literature on SBM, by exposing all the errors we could trace in the treatment so far. Recognizing however the potential of the SBM skew-normal marginals for risk-neutral valuation, as a positive contribution, we reformulate the putative SBM call pricing formula and show that, even if the SBM return model admits arbitrage, its option pricing formula does not. The correct Markovian SDE with skew-normal marginals is then identified, its strong well-posedness shown, and by exploiting the availability of closed formulae, an asymptotic analysis of the implied volatility surface is offered. En route to our conclusions, we obtain a novel normal/skew-normal stochastic dominance property of independent interest.

q-fin.MF↗