The Valuation of Power Exchange Options with Counterparty Risk and Jump Risk

Xingchun Wang (), Shiyu Song and Yongjin Wang

Journal of Futures Markets, 2017, vol. 37, issue 5, 499-521

Abstract: This study presents a pricing model for power exchange options, in which the possibility of default by the risky counterparty as well as the arrival of important business information are taken into consideration. The idiosyncratic and common jump components induced by the arrival of business information are subsumed into all asset price processes whose dynamics are correlated with each other. Employing the measure‐change technique, we obtain a pricing formula for the values of power exchange options with counterparty risk. At last, based on the derived formula, we numerically analyze the impacts of counterparty risk and jump risk on option prices. © 2016 Wiley Periodicals, Inc. Jrl Fut Mark 37:499–521, 2017

Date: 2017
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