Solution Representations of Solving Problems for the Black-Scholes equations and Application to the Pricing Options on Bond with Credit Risk

Hyong-Chol O, Tae-Song Kim and Tae-Song Choe

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Abstract: In this paper is investigated the pricing problem of options on bonds with credit risk based on analysis on two kinds of solving problems for the Black-Scholes equations. First, a solution representation of the Black-Scholes equation with the maturity payoff function which is the product of the power function, normal distribution function and characteristic function is provided. Then a solution representation of a special terminal boundary value problem of the Black-Sholes equation is provided and its monotonicity is proved. The simplest case of the structural model of the credit bond is studied and its pricing formula is provided, and based on the results, the pricing model of option on corporate bond with credit risk is transformed into a terminal boundary value problem of the Black-Scholes equation with some special maturity payoff functions and the solution formula is obtained. Using it, we provide the pricing formulae of the puttable and callable bonds with credit risk.

Date: 2021-08, Revised 2021-11
New Economics Papers: this item is included in nep-isf
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