New Pricing Models

On a vast majority of stock options a certain amount of dividend is paid at certain time(s). So it would be most natural to consider the dividend payment as a discrete process. Literature offers several model approaches with deterministic, discrete dividends and a certain interest rate. In reality the dividend amount(s) are not known a priori while the interest rate may fluctuate during the life of an option. A suitable model approach useful for European and also American styled options, i.e. when the holder has the possibility to early exercise prior to maturity, is the Binomial tree method. SFISS Financial Technology B.V. made certain model extensions of AtomPro's pricing library concerning the Binomial pricing model.
In the AtomProŽ latest version several adaptations have been made regarding how one should account for fixed cash dividends in option pricing in the framework of the Binomial pricing model. Several model approaches from literature have been reviewed and tested on their pros and cons.
An alternative model to treat fixed cash dividends has been implemented by SFT to ensure accuracy and desired efficiency for our screen trading software. The model accommodates (for European/American call/put) prices close to the correct values, especially in multiple dividend payment.

Next to the former extension, the latest version of the AtomPro Screen TraderŽ offers the possibility to work with a Forward rate interest rate curve, instead of a Spot rate. With these extensions SFT contributes to a more realistic character of the Binomial model approach and obtaining prices closer to market values.

For more information about the AtomPro New pricing models, please contact us:

AtomPro B.V.
T: +31 (20) 55 10 500