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.
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The authors are very grateful to the editors and the anonymous referees for their careful reading of the paper and helpful suggestions.
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Q. Zhou is partly supported by the National Natural Science Foundation of China (No. 11471051 and No. 11871010). W.X. Wu is partly supported by the National Social Science Foundation of China (No. 16ZDA033)
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Zhou, Q., Yang, Jj. & Wu, Wx. Pricing Vulnerable Options with Correlated Credit Risk Under Jump-diffusion Processes When Corporate Liabilities Are Random. Acta Math. Appl. Sin. Engl. Ser. 35, 305–318 (2019). https://doi.org/10.1007/s10255-019-0821-y
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DOI: https://doi.org/10.1007/s10255-019-0821-y