Abstract
In this article, we derive closed-form, interpolation-based expressions for European call options written on defaultable assets. Our results are based on the work of Henderson et al, who derive formulas that incorporate standard static no-arbitrage restrictions, and Orosi who establishes an improved lower bound for European call options written on defaultable assets. Although, in general, the models are incapable of representing the entire call option surface because of the low number of parameters, we demonstrate their applicability to extract important quantities from quoted options. In particular, the probability of default and the size of a default barrier can be inferred from the model.
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Orosi, G. Closed-form interpolation-based formulas for European call options written on defaultable assets. J Asset Manag 16, 236–242 (2015). https://doi.org/10.1057/jam.2015.1
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DOI: https://doi.org/10.1057/jam.2015.1