Pricing vulnerable options with variable default boundary under jump-diffusion processes
Abstract For the pricing of vulnerable options, we improve the results of Klein and Inglis [Journal of Banking and Finance] and Tian et al. [The Journal of Futures and Markets], considering the circumstances in which the writers of options face financial crisis. Our pricing model faces the risks of...
| Main Authors: | , , |
|---|---|
| Format: | Article |
| Language: | English |
| Published: |
SpringerOpen
2018-12-01
|
| Series: | Advances in Difference Equations |
| Subjects: | |
| Online Access: | http://link.springer.com/article/10.1186/s13662-018-1915-1 |
| _version_ | 1819178261812346880 |
|---|---|
| author | Qing Zhou Qian Wang Weixing Wu |
| author_facet | Qing Zhou Qian Wang Weixing Wu |
| author_sort | Qing Zhou |
| collection | DOAJ |
| description | Abstract For the pricing of vulnerable options, we improve the results of Klein and Inglis [Journal of Banking and Finance] and Tian et al. [The Journal of Futures and Markets], considering the circumstances in which the writers of options face financial crisis. Our pricing model faces the risks of default and the occasional impact experienced by the underlying assets and counterparty’s assets. The correlation between the option’s underlying assets and the option writer’s assets is clearly modeled. Asset prices are driven by the jump-diffusion processes of two related assets. Furthermore, we consider a variable default boundary (VDB) based on the option’s potential debt and the option writer’s other liabilities. In case financial distress happens, the payout rate is connected to the option writer’s assets. Through the Taylor expansion, we derive an approximate explicit valuation for vulnerable options. |
| first_indexed | 2024-12-22T21:39:45Z |
| format | Article |
| id | doaj.art-690d055a35604aeea85dd20a251e1e66 |
| institution | Directory Open Access Journal |
| issn | 1687-1847 |
| language | English |
| last_indexed | 2024-12-22T21:39:45Z |
| publishDate | 2018-12-01 |
| publisher | SpringerOpen |
| record_format | Article |
| series | Advances in Difference Equations |
| spelling | doaj.art-690d055a35604aeea85dd20a251e1e662022-12-21T18:11:39ZengSpringerOpenAdvances in Difference Equations1687-18472018-12-012018112110.1186/s13662-018-1915-1Pricing vulnerable options with variable default boundary under jump-diffusion processesQing Zhou0Qian Wang1Weixing Wu2School of Science, Beijing University of Posts and TelecommunicationsSchool of Science, Beijing University of Posts and TelecommunicationsSchool of Banking and Finance, University of International Business and EconomicsAbstract For the pricing of vulnerable options, we improve the results of Klein and Inglis [Journal of Banking and Finance] and Tian et al. [The Journal of Futures and Markets], considering the circumstances in which the writers of options face financial crisis. Our pricing model faces the risks of default and the occasional impact experienced by the underlying assets and counterparty’s assets. The correlation between the option’s underlying assets and the option writer’s assets is clearly modeled. Asset prices are driven by the jump-diffusion processes of two related assets. Furthermore, we consider a variable default boundary (VDB) based on the option’s potential debt and the option writer’s other liabilities. In case financial distress happens, the payout rate is connected to the option writer’s assets. Through the Taylor expansion, we derive an approximate explicit valuation for vulnerable options.http://link.springer.com/article/10.1186/s13662-018-1915-1Credit riskDefaultJump-diffusionPricingVulnerable option |
| spellingShingle | Qing Zhou Qian Wang Weixing Wu Pricing vulnerable options with variable default boundary under jump-diffusion processes Advances in Difference Equations Credit risk Default Jump-diffusion Pricing Vulnerable option |
| title | Pricing vulnerable options with variable default boundary under jump-diffusion processes |
| title_full | Pricing vulnerable options with variable default boundary under jump-diffusion processes |
| title_fullStr | Pricing vulnerable options with variable default boundary under jump-diffusion processes |
| title_full_unstemmed | Pricing vulnerable options with variable default boundary under jump-diffusion processes |
| title_short | Pricing vulnerable options with variable default boundary under jump-diffusion processes |
| title_sort | pricing vulnerable options with variable default boundary under jump diffusion processes |
| topic | Credit risk Default Jump-diffusion Pricing Vulnerable option |
| url | http://link.springer.com/article/10.1186/s13662-018-1915-1 |
| work_keys_str_mv | AT qingzhou pricingvulnerableoptionswithvariabledefaultboundaryunderjumpdiffusionprocesses AT qianwang pricingvulnerableoptionswithvariabledefaultboundaryunderjumpdiffusionprocesses AT weixingwu pricingvulnerableoptionswithvariabledefaultboundaryunderjumpdiffusionprocesses |