A Simple Pricing Model for Plain-Vanilla Dividend Futures Options

Abstract

This technical note provides a detailed description of a simple but effective modeling solution to mark and risk manage plain-vanilla options on dividend futures. We focus on equity indices, as dividend products for single stocks are less liquid and observable and we derive a simple pricing formula for dividend futures options based on a dynamic replication argument. The simplicity of the derived pricing methodology makes it particularly relevant for marking-making purpose.

Keywords: Dividend futures options, Black-Scholes, pricing, equity derivatives, Eurostoxx

JEL Classification: G13