Article2016

Differences in the Prices of Vulnerable Options with Different Counterparties

23 citations0/0 files storedJournal of Futures Markets

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Stochastic processes and financial applications Financial Markets and Investment Strategies Financial Risk and Volatility Modeling

Abstract

Abstract In this paper, a new pricing model is proposed to investigate the differences in the prices of vulnerable options with different counterparties. I start by specifying the dynamics of the market portfolio, and then break down the risk of the underlying asset and the assets of the counterparties into systematic and idiosyncratic risk, which allows me to distinguish the counterparties from these two kinds of risk. Finally, the derived pricing formulae are used to illustrate the differences between vulnerable option prices. © 2016 Wiley Periodicals, Inc. Jrl Fut Mark 37:148–163, 2017

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References

1976Option pricing when underlying stock returns are discontinuous 1981Martingales and stochastic integrals in the theory of continuous trading 1994Corporate Debt Value, Bond Covenants, and Optimal Capital Structure 1997Empirical Performance of Alternative Option Pricing Models 1996Optimal Capital Structure, Endogenous Bankruptcy, and the Term Structure of Credit Spreads 1995Pricing Derivatives on Financial Securities Subject to Credit Risk 2004Option Pricing Under a Double Exponential Jump Diffusion Model 2012Rollover Risk and Credit Risk

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2018VALUATION OF VULNERABLE OPTIONS UNDER THE DOUBLE EXPONENTIAL JUMP MODEL WITH STOCHASTIC VOLATILITY

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