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Question on FinancialDerivative in Ver 8

  • To: mathgroup at smc.vnet.net
  • Subject: [mg114065] Question on FinancialDerivative in Ver 8
  • From: Dana DeLouis <dana.del at gmail.com>
  • Date: Mon, 22 Nov 2010 07:39:27 -0500 (EST)

Hi. Here's a Call option with Low Volatility 1 year out.
A dividend of 0 returns a value of 0.05 for this call option.

FinancialDerivative[
 {"American", "Call"},
  {"StrikePrice" -> 50,
   "Expiration" -> 1},
   { "CurrentPrice" -> 30,
  "InterestRate" -> .1,
   "Volatility" -> .2,
  "Dividend" -> 0}]

0.05384

If I increase the Dividend to a penny, the Call option goes =91up=92 (not down) in price to 0.087 ??

FinancialDerivative[
 {"American", "Call"},
  {"StrikePrice" -> 50,
   "Expiration" -> 1},
   { "CurrentPrice" -> 30,
  "InterestRate" -> .1,
   "Volatility" -> .2,
  "Dividend" -> .01}]

0.08731

If during a calculation, the dividend is calculated close to zero (say 0.0001) the Call Option is now worth $27.05 ??   Huh?   How I would love to sell this Call option all day long.  :>)

FinancialDerivative[
 {"American", "Call"},
  {"StrikePrice" -> 50,
   "Expiration" -> 1},
   { "CurrentPrice" -> 30,
  "InterestRate" -> .1,
   "Volatility" -> .2,
  "Dividend" -> 0.0001}]

27.05

A Dividend of 0.10 brings the price back down to below that of the 0 dividend price.

FinancialDerivative[
 {"American", "Call"},
  {"StrikePrice" -> 50,
   "Expiration" -> 1},
   { "CurrentPrice" -> 30,
  "InterestRate" -> .1,
   "Volatility" -> .2,
  "Dividend" -> .10}]

0.01211

Any thoughts/insight into this?
Thanks.
I'm using an Apple Mac Pro w/ Ver 8.



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