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2016•Covenant University Repository (Covenant University)Requires access

Understanding How Dividends Affect Option Prices

S. O. Edeki, Olabisi O. Ugbebor, E. A. Owoloko

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Abstract

In this paper, we propose a pricing model for stock option valuation. The model is derived from the classical Black-Scholes option pricing equation via the application of the constant elasticity of variance (CEV) model with dividend yield. This modifies the Black- Scholes equation by incorporating a non-constant volatility power function of the underlying stock price, and a dividend yield parameter.

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In this paper, we propose a pricing model for stock option valuation. The model is derived from the classical Black-Scholes option pricing equation via the application of the constant elasticity of variance (CEV) model with dividend yield. This modifies the Black- Scholes equation by incorporating a non-constant volatility power function of the underlying stock price, and a dividend yield parameter.

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Available abstract

In this paper, we propose a pricing model for stock option valuation. The model is derived from the classical Black-Scholes option pricing equation via the application of the constant elasticity of variance (CEV) model with dividend yield. This modifies the Black- Scholes equation by incorporating a non-constant volatility power function of the underlying stock price, and a dividend yield parameter.

Key concepts: Dividend, Black–Scholes model, Economics, Constant elasticity of variance model, Econometrics, Valuation of options, Dividend yield, Valuation (finance)

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