Analytical Valuation of Vulnerable Exchange Options with Stochastic Volatility in a Reduced-Form Model

Junkee Jeon and Geonwoo Kim ()
Additional contact information
Junkee Jeon: Department of Applied Mathematics, Kyung Hee University, Yongin 17104, Republic of Korea
Geonwoo Kim: School of Natural Sciences, Seoul National University of Science and Technology, Seoul 01811, Republic of Korea

Mathematics, 2024, vol. 12, issue 24, 1-11

Abstract: This paper investigates the valuation of vulnerable exchange options with two underlying assets that follow a two-factor volatility model. We employ a reduced-form model incorporating a Poisson process with stochastic intensity. The proposed reduced-form model depends on a stochastic intensity process that is guaranteed to remain positive and includes both systemic and idiosyncratic risks. Using measure change techniques and characteristic functions, we obtain an explicit pricing formula for vulnerable exchange options within the proposed framework. We also provide numerical examples demonstrating the sensitivity of option prices to significant parameters.

Keywords: exchange option; vulnerable option; stochastic volatility; reduced-form model (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.mdpi.com/2227-7390/12/24/3879/pdf (application/pdf)
https://www.mdpi.com/2227-7390/12/24/3879/ (text/html)

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: https://EconPapers.repec.org/RePEc:gam:jmathe:v:12:y:2024:i:24:p:3879-:d:1540475

Access Statistics for this article

Mathematics is currently edited by Ms. Emma He

More articles in Mathematics from MDPI
Bibliographic data for series maintained by MDPI Indexing Manager ().