Hmmm... most OPM's are US based and there they have at least two ways of dealing with dividends which in the main are paid yearly.
One OPM attempts to price FAIR VALUE (as Andrew's OPM above) as what is known as the 'continuous' method. Some compensate within the Stock price whilst others with the Risk-free Rate.
The other is to deal with dividends as discrete payments in various ways.
The main issue concerning OPM's is to provide a FAIR VALUE that all can use with confidence. There are many variants of the BS and Binomial themes and each needs to find that which works for them as no two give identical results.
In Oz we have a twice-yearly discrete dividend payment arrangement and accordingly the industry in the main uses the discrete method.
I have posted a methodology and maths here previously as to how to deal with discrete payments of dividends for OPM's which is available in the archive.
As previously, there are valid reasons for 'smoothing' OPM's FAIR VALUE pricing as an Underlying goes ex-div.
Those using OPM's will need to address the issue of discrete dividends in their own way. The important thing for all is that FAIR VALUE calculations correspond with those of the Market as well as I/Vols.
