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9.1  Overview


n the standard Black-Scholes option pricing analysis, the underlying asset pays zero dividends over the life of the option.  Here we consider relaxing this assumption to allow for the effects of a constant continuous dividend yield over the life of the option.

The constant continuous dividend yield option pricing model (Merton, 1974) provides a useful framework for deriving a variety of different models to price, for example, currency options, interest rate caps and floors, and options on futures.

In topic 9.2,  we develop the Constant Continuous Dividend Yield Option Pricing Model and then examine the sensitivity of the option's value to small changes in the underlying variables in topic 9.3, titled Comparative Statics.