RT Journal Article SR Electronic T1 Consistent Modeling of Discrete Cash Dividends JF The Journal of Derivatives FD Institutional Investor Journals SP 9 OP 19 DO 10.3905/jod.2015.22.3.009 VO 22 IS 3 A1 German Bernhart A1 Jan-Frederik Mai YR 2015 UL https://pm-research.com/content/22/3/9.abstract AB Both basic Black–Scholes and plain vanilla binomial models price options on non-dividend-paying stocks. But most stocks pay discrete dividends, and pricing models—especially for American options—must account for that fact, which is not that easy to do without upsetting the price dynamics of the original model. In principle, the value of a stock is the expected present value of its cash payouts out to the infinite future. In this article, the authors develop an approach that greatly simplifies the problem. The future stream of dividends is separated into two parts: those that occur in the immediate future and can be predicted out to some maximum forecasting horizon and the present value of all dividends to be received after that date. The latter is assumed to follow a specified stochastic process. This structure allows available information about near-term dividends to be fully incorporated while maintaining flexibility to use a wide range of processes for the total value due to long-term dividend flow.TOPICS: Options, security analysis and valuation, quantitative methods