Pricing vulnerable options with stochastic default barriers
Finance Research Letters, 2016, vol. 19, issue C, 305-313
In this paper, we investigate the pricing issue of vulnerable options by assuming that the dynamics of all assets are governed by jump-diffusion processes with common factors in both continuous process and jump process components. Moreover, assume credit default event occurs when the value of the counterparty’s assets falls below the default barrier, which is stochastically affected by common factors as well. In the proposed framework, we derive a closed-form formula for vulnerable options and illustrate the impacts of stochastic barriers on option prices. Additionally, the U-shape curve appears when we investigate option prices against the volatility of default barriers.
Keywords: Vulnerable options; Stochastic default barriers; Common factors; Jump-diffusion processes; Credit risk (search for similar items in EconPapers)
JEL-codes: G13 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations Track citations by RSS feed
Downloads: (external link)
Full text for ScienceDirect subscribers only
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:19:y:2016:i:c:p:305-313
Access Statistics for this article
Finance Research Letters is currently edited by R. GenÃ§ay
More articles in Finance Research Letters from Elsevier
Series data maintained by Dana Niculescu ().