Economics at your fingertips  

Pricing vulnerable options with stochastic default barriers

Xingchun Wang

Finance Research Letters, 2016, vol. 19, issue C, 305-313

Abstract: 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)
Date: 2016
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

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Access Statistics for this article

Finance Research Letters is currently edited by R. Gençay

More articles in Finance Research Letters from Elsevier
Series data maintained by Dana Niculescu ().

Page updated 2018-01-24
Handle: RePEc:eee:finlet:v:19:y:2016:i:c:p:305-313