medium · Quantitative Finance stochastic
If you are using the Feynman-Kac formula to price an option where the underlying S_t has a dividend yield q, how does this affect the SDE used in the expectation?
- The volatility σ is reduced by q.
- The discount factor becomes e^-(r+q)(T-t).
- The drift of S_t becomes (r - q)S_t.
- The terminal payoff h(S_T) is multiplied by e^qT.
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