Closed-form pricing formula for foreign equity option with credit risk
Abstract Since credit risk in the over-the-counter (OTC) market has undoubtedly become very important issue, credit risk has to be considered when the options in the OTC market are priced. In this paper, we consider the valuation of foreign equity options with credit risk. In order to derive a close...
| Main Authors: | , , |
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| Format: | Article |
| Language: | English |
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SpringerOpen
2021-07-01
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| Series: | Advances in Difference Equations |
| Subjects: | |
| Online Access: | https://doi.org/10.1186/s13662-021-03486-7 |
| _version_ | 1818576558995013632 |
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| author | Donghyun Kim Ji-Hun Yoon Geonwoo Kim |
| author_facet | Donghyun Kim Ji-Hun Yoon Geonwoo Kim |
| author_sort | Donghyun Kim |
| collection | DOAJ |
| description | Abstract Since credit risk in the over-the-counter (OTC) market has undoubtedly become very important issue, credit risk has to be considered when the options in the OTC market are priced. In this paper, we consider the valuation of foreign equity options with credit risk. In order to derive a closed-form pricing formula of this option, we adopt the partial differential equation (PDE) approach and use the Mellin transform method to solve the PDE. Specifically, triple Mellin transforms are used, and the pricing formula is presented as 3-dimensional normal cumulative distribution functions. Finally, we verify that our closed-form formula is accurate by comparing it with the numerical result from the Monte-Carlo simulation. |
| first_indexed | 2024-12-16T06:15:56Z |
| format | Article |
| id | doaj.art-69a3873c88cc4c5da66016582dd21006 |
| institution | Directory Open Access Journal |
| issn | 1687-1847 |
| language | English |
| last_indexed | 2024-12-16T06:15:56Z |
| publishDate | 2021-07-01 |
| publisher | SpringerOpen |
| record_format | Article |
| series | Advances in Difference Equations |
| spelling | doaj.art-69a3873c88cc4c5da66016582dd210062022-12-21T22:41:16ZengSpringerOpenAdvances in Difference Equations1687-18472021-07-012021111710.1186/s13662-021-03486-7Closed-form pricing formula for foreign equity option with credit riskDonghyun Kim0Ji-Hun Yoon1Geonwoo Kim2Department of Mathematics, Pusan National UniversityDepartment of Mathematics, Pusan National UniversitySchool of Liberal Arts, Seoul National University of Science and TechnologyAbstract Since credit risk in the over-the-counter (OTC) market has undoubtedly become very important issue, credit risk has to be considered when the options in the OTC market are priced. In this paper, we consider the valuation of foreign equity options with credit risk. In order to derive a closed-form pricing formula of this option, we adopt the partial differential equation (PDE) approach and use the Mellin transform method to solve the PDE. Specifically, triple Mellin transforms are used, and the pricing formula is presented as 3-dimensional normal cumulative distribution functions. Finally, we verify that our closed-form formula is accurate by comparing it with the numerical result from the Monte-Carlo simulation.https://doi.org/10.1186/s13662-021-03486-7Foreign equity optionMellin transformsCredit riskStructural model |
| spellingShingle | Donghyun Kim Ji-Hun Yoon Geonwoo Kim Closed-form pricing formula for foreign equity option with credit risk Advances in Difference Equations Foreign equity option Mellin transforms Credit risk Structural model |
| title | Closed-form pricing formula for foreign equity option with credit risk |
| title_full | Closed-form pricing formula for foreign equity option with credit risk |
| title_fullStr | Closed-form pricing formula for foreign equity option with credit risk |
| title_full_unstemmed | Closed-form pricing formula for foreign equity option with credit risk |
| title_short | Closed-form pricing formula for foreign equity option with credit risk |
| title_sort | closed form pricing formula for foreign equity option with credit risk |
| topic | Foreign equity option Mellin transforms Credit risk Structural model |
| url | https://doi.org/10.1186/s13662-021-03486-7 |
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