Fast Trees for Options with Discrete Dividends

Posted: 20 May 2019

See all articles by Nelson Areal

Nelson Areal

University of Minho - School of Economics and Management

Artur Rodrigues

University of Minho - NIPE and School of Economics and Management

Date Written: December 2010

Abstract

The valuation of options using a binomial non-recombining tree with discrete dividends can be intricate. This paper proposes three different enhancements that can be used alone or combined to value American options with discrete dividends using a non-recombining binomial tree. These methods are compared in terms of both speed and accuracy with a large sample of options with one to four discrete dividends. This comparison shows that the best results can be achieved by the simultaneous use of the three enhancements. These enhancements when used together result in significant speed/accuracy gains in the order of up to 200 times for call options and 50 times for put options. These techniques allow the use of a non-recombining binomial tree with very good accuracy for valuing options with up to four discrete dividends in a timely manner.

Keywords: Option valuation, Discrete dividends, Binomial trees

JEL Classification: G13

Suggested Citation

Brandão da Costa Areal, Nelson Manuel de Pinho and Rodrigues, Artur, Fast Trees for Options with Discrete Dividends (December 2010). https://doi.org/10.3905/jod.2013.21.1.049. Available at SSRN: https://ssrn.com/abstract=1767834 or http://dx.doi.org/10.2139/ssrn.1767834

Nelson Manuel de Pinho Brandão da Costa Areal

University of Minho - School of Economics and Management ( email )

University of Minho
School of Economics and Management
Braga, 4710-057
Portugal
+351 253 601 380 (Fax)

HOME PAGE: http://nelsonareal.net

Artur Rodrigues (Contact Author)

University of Minho - NIPE and School of Economics and Management ( email )

School of Economics and Management
Braga, 4710-057
Portugal

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