Discrete dividends after maturity adjust the stock and strike prices

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Highly relevant for quantitative traders dealing with equity options on dividend-paying stocks. The paper corrects a common pricing error (ignoring dividends after maturity) that can lead to 31% overestimation in some cases. The extended RGW formula and optimal exercise policy characterization are directly applicable to American option trading strategies. The resolution of erroneous arbitrage claims is important for model validation. However, the practical impact may be modest for at-the-money options where errors are small (~3%).

The formulas are analytical and relatively straightforward to implement. The extended Black-Scholes formula (Theorem 2.3) simply requires adjusting both stock and strike prices. The extended RGW formula (Theorem 3.5) requires implementing the standard RGW formula with modified parameters and handling the trichotomy of exercise policies. The main complexity lies in correctly identifying which case applies (N, M, or A) and computing the critical stock price S* when needed. The binomial tree verification adds moderate complexity.

The paper provides complete analytical formulas (Theorems 2.3, 3.5, Corollaries 2.4, 3.7) with all parameters clearly defined. Numerical examples with specific parameter values are provided. The methodology is purely analytical with no proprietary data or code required. Binomial tree verification method is described. However, no code repository is explicitly provided.