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Over‐the‐Counter Option Market Dividend Protection and “Biases” in the Black‐Scholes Model: A Note
Author(s) -
GESKE ROBERT,
ROLL RICHARD,
SHASTRI KULDEEP
Publication year - 1983
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1983.tb02295.x
Subject(s) - dividend , black–scholes model , financial economics , expiration date , exotic option , economics , expiration , over the counter , liberian dollar , dividend yield , valuation of options , monetary economics , business , dividend policy , finance , volatility (finance) , medicine , food science , medical prescription , chemistry , respiratory system , pharmacology
Most options are traded over‐the‐counter (OTC) and are dividend “protected;” the exercise price decreases on the ex date by an amount equal to the dividend. This protection completely inhibits the early exercise of American call options. Nevertheless, OTC‐protected options have market values which differ systematically from Black‐Scholes values for European options on non‐dividend paying stocks. The pricing difference is related to both the variance of the underlying stock return and to time until expiration of the option, but it is quite small in dollar amount.