18.14 Trees and dividend yields When a stock price pays continuous dividends at rate g we construct the tree in the same way but set a=e(r-q )ot As with Black-scholes For options on stock indices, g equals the dividend yield on the index For options on a foreign currency, q equals the foreign risk-free rate For options on futures contracts g=r Options, Futures, and Other Derivatives, 5th edition C 2002 by John C Hull18.14 Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull Trees and Dividend Yields • When a stock price pays continuous dividends at rate q we construct the tree in the same way but set a = e (r – q )dt • As with Black-Scholes: - For options on stock indices, q equals the dividend yield on the index - For options on a foreign currency, q equals the foreign risk-free rate - For options on futures contracts q = r