Note that by the arbitrage-free principle, it is easy to show that when a stock pays a dividend D at t, the stock's value is immediately reduced by the amount of the dividend. In other words, liment, St - D1 = limtut St. 3.4 3.E 37 3.6 3.5 3.3 3.2 3.1 10 12 Figure 1.2: t1 = 5, ta = 10, D = 0.4, D2 = 0.4. Assume that a dividend D, is paid at time tj, where 0