How to make the Black-Sholes model work with a company that pays dividends? | TigerDroppings.com
Posted by
Message
ClydeFrog
New Orleans Saints Fan
LA
Member since Jul 2012
3164 posts

How to make the Black-Sholes model work with a company that pays dividends?

I know the model assumes that no dividends are paid but I have heard that it is not too complicated to work with a company that does pay dividends if some changes are made. Does anyone know how to do this?


Doc Fenton
LSU Fan
Member since Feb 2007
51088 posts

re: How to make the Black-Sholes model work with a company that pays dividends?
The no dividends assumption is actually not one of the fundamental assumptions of the BS model.

You have to decide whether or not you want to model the dividends continuously or discretely. This is discussed in the Wikipedia entry for Black Scholes under "Extensions of the model." Like it says, using a continuously compounded dividend rate is typically better suited for modeling an investment basket having a large number of stocks, whereas if you have a single stock with known payout dates, then you'll probably want to factor in each dividend payment discretely.


Replies (0)
Replies (0)
Page 1 of 1

Back to top

Follow TigerDroppings for LSU Football News
Follow us on Twitter, Facebook and Instagram to get the latest updates on LSU Football and Recruiting.

FacebookTwitterInstagram