The valuation of options on index futures with stochastic dividend yields

Abstract

This paper develops a valuation model for European options on index futures considering the stochastic nature of dividend yields. In addition, this research examines two subjects: first, whether the assumption of stochastic dividend yields is relevant; and second, the model's performance regarding the futures volatility curve. The model is calibrated using maximum likelihood estimation. The results suggest that the assumption of stochastic dividend yields has a significant influence in the valuation of options on index futures, even after considering commission costs. In addition, the model performs well in explaining the observed futures volatility curve. In this sense, the findings suggest that investment strategies based on mathematical models must consider the stochastic nature of dividend yields.