Benchmarking Option Pricing Models with Discrete Dividends

Summary

The document recommends validating a newly implemented option model against benchmark cases, even when its prices appear reasonable. It asks for reference prices for an American call under a specific setup: the stock begins at the strike, has a one-year expiry, pays a fixed deterministic dividend midway through the life of the option, and faces a zero interest rate. It suggests that constant-volatility Black–Scholes is also a useful special case for comparison.

The example highlights why validation should include exercise style and discrete cash dividends: these features can affect option value and make a basic benchmark less straightforward than a vanilla European contract. The document itself does not provide benchmark prices, identify a data source, or specify volatility, so it is a request for validation references rather than a complete test case. A usable numerical comparison would require the missing volatility input and a clearly defined pricing setup.

Key ideas

• Compare a new option model with benchmark cases even when its outputs seem sensible.
• Include American exercise and discrete deterministic dividends in validation examples when those features are supported.
• The proposed setup specifies strike, spot, maturity, dividend timing and amount, and a zero interest rate.
• The document asks for reference prices but supplies neither benchmark results nor a volatility input.

Tags

# Examples for the option model validation


# Examples for the option model validation












When implementing a code for the new model, even if it provides sensible price, it is still a good idea to compare it against some benchmarks, even in the special case of constant volatility Black-Scholes model. For example, I am interested in the price for American-style Call with strike 100 and expiry in 1 year, on stock that is 100 now, pays 3 eur fixed discrete deterministic dividend after 0.5 years, in the 0 interest rate environment. Are there any source with similar examples?

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.