Pricing vulnerable basket spread options with liquidity risk

Ziming Dong, Dan Tang () and Xingchun Wang ()
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Ziming Dong: University of International Business and Economics
Dan Tang: University of International Business and Economics

Review of Derivatives Research, 2023, vol. 26, issue 1, No 2, 23-50

Abstract: Abstract In this paper, we investigate the pricing of vulnerable basket options and basket spread options with stochastic liquidity risk. A liquidity-adjusted pricing model is used to incorporate liquidity risk in the market, and the default risk of option issuers is considered as well. An approximation method is applied to derive the closed-form approximated prices, and numerical experiments show that our approximated prices are quite accurate spanning different underlying asset numbers and alternative strike prices. Finally, we illustrate the effects of default risk and liquidity risk on the prices of basket and basket spread options numerically.

Keywords: Vulnerable basket spread options; Vulnerable basket options; Stochastic liquidity risk; Default risk (search for similar items in EconPapers)
JEL-codes: G13 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s11147-022-09192-0

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