Valuing vulnerable options with bond collateral

Guanying Wang and Xingchun Wang ()

Applied Economics Letters, 2021, vol. 28, issue 2, 115-118

Abstract: This paper investigates vulnerable European options with bond collateral. Working with stochastic interest rate, we evaluate vulnerable options under four cases of collateral according to the length of time to maturity of the government bonds, including cash, short term bonds, medium term bonds, and long term bonds. The impacts of collateral and credit risk on vulnerable option prices are illustrated numerically.

Date: 2021
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DOI: 10.1080/13504851.2020.1736495

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