Geske and Roll are from the Graduate School of Management, University of California, Los Angeles, and Shastri is from the Graduate School of Business, University of Pittsburgh.
Over-the-Counter Option Market Dividend Protection and “Biases” in the Black-Scholes Model: A Note
Article first published online: 30 APR 2012
1983 The American Finance Association
The Journal of Finance
Volume 38, Issue 4, pages 1271–1277, September 1983
How to Cite
GESKE, R., ROLL, R. and SHASTRI, K. (1983), Over-the-Counter Option Market Dividend Protection and “Biases” in the Black-Scholes Model: A Note. The Journal of Finance, 38: 1271–1277. doi: 10.1111/j.1540-6261.1983.tb02295.x
- Issue published online: 30 APR 2012
- Article first published online: 30 APR 2012
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.