A bivariate lattice model for valuing options on assets paying discrete dividends

This article proposes a bivariate lattice model for evaluating both European and American when when the underlying asset, whose dynamics is described by means of geometric Brownian motion with stochastic interest rate pays discrete dividends.. The main advantage of the model stays in that the original processes for the equityand the interest rate are directly discretized by means of lattice approximations, without resorting to any additional transformation. Then, the arising lattices are combined in order to establish a bivariate tree where the present values of the option is computed by discounting the policy payoff over the lattice branches.