Valuation of vulnerable options using a bivariate Gram–Charlier approximation

Dingding Dong, Xinyue Ou () and Xingchun Wang ()
Additional contact information
Dingding Dong: Jilin University
Xinyue Ou: University of International Business and Economics

Review of Derivatives Research, 2025, vol. 28, issue 1, No 1, 30 pages

Abstract: Abstract In this paper, we focus on vulnerable options using the bivariate Gram–Charlier approximation, rather than any specific stochastic processes as in previous studies on vulnerable options. After deriving a closed-form pricing formula of vulnerable options, we perform numerical examples to illustrate the effects of the (co)skewness and excess (co)kurtosis parameters. Numerical results show that the skewness (excess kurtosis) parameters of the underlying asset and the issuer’s assets have opposite effects on vulnerable option prices. Specially, all the counterintuitive observations are explained by emphasizing the role of the risk compensation item.

Keywords: Vulnerable options; Gram–Charlier approximation; Skewness; Kurtosis; Default risk (search for similar items in EconPapers)
JEL-codes: G13 (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s11147-024-09207-y Abstract (text/html)
Access to full text is restricted to subscribers.

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:kap:revdev:v:28:y:2025:i:1:d:10.1007_s11147-024-09207-y

Ordering information: This journal article can be ordered from
http://www.springer. ... 29/journal/11147/PS2

DOI: 10.1007/s11147-024-09207-y

Access Statistics for this article

Review of Derivatives Research is currently edited by Gurdip Bakshi and Dilip Madan

More articles in Review of Derivatives Research from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().