Dividend yield method

When the dividend is in the form of yield it can be easily 'netted off' from the risk-free interest rate as in the case of a currency option. To calculate the dividend yield of an index option, the dividend yield, q, is the average annualized yield of dividends distributed during the life of the option:

where Di and ti are the amount and the timing of the i th dividend on the index with ti should also be annualized in a similar fashion as t. The dividend yield rate computed here is thus from the actual dividends paid during the option's life which will therefore account for the monthly seasonality in dividend payments.

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