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(2014)
Option pricing based on the credit Risk
- Publisher
- Springer Journals
- Copyright
- Copyright © 2019 by The Editorial Office of AMAS & Springer-Verlag GmbH Germany
- Subject
- Mathematics; Applications of Mathematics; Math Applications in Computer Science; Theoretical, Mathematical and Computational Physics
- ISSN
- 0168-9673
- eISSN
- 1618-3932
- DOI
- 10.1007/s10255-019-0821-y
- Publisher site
- See Article on Publisher Site
Abstract
In this paper, we consider an improved model of pricing vulnerable options with credit risk. We assume that the vulnerable European options not only face default risk, but also face the rare shocks of the underlying assets and the counterparty assets. The dynamics of two correlated assets are modeled as a class of jump diffusion processes. Furthermore, we assume that the dynamic of the corporate liability is a geometric Brownian motion that is related to the underlying asset and the counterparty asset. Under this new framework, we give an explicit pricing formula of the vulnerable European options.
Journal
Acta Mathematicae Applicatae Sinica – Springer Journals
Published: May 15, 2019