The contractual dividend bleed

Models for dividend protected options need to compensate for valuation mismatches


There is evidence that some desks are still risk managing dividend protected options using a simplified Black-Scholes approach. François Henneton, Amrit Sharma and Benjamin Carton de Wiart demonstrate how this leads to a one-sided daily bleed, and they present some simple estimates of the valuation adjustment under a cash dividend model that, under idealised scenarios, exactly compensates for the bleed

Equity derivatives brokers use different models for dividend

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