Explicit Pricing Formulas for European Option with Asset Exposed to Double Defaults Risk
We derive analytical formulas for European call and put options on underlying assets that are exposed to double defaults risks which include exogenous counterparty default risk and endogenous default risk. The endogenous default risk leads the asset price to drop to zero and the exogenous counterpar...
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| Format: | Article |
| Language: | English |
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Wiley
2018-01-01
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| Series: | Discrete Dynamics in Nature and Society |
| Online Access: | http://dx.doi.org/10.1155/2018/8362912 |
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| _version_ | 1850170681189203968 |
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| author | Taoshun He |
| author_facet | Taoshun He |
| author_sort | Taoshun He |
| collection | DOAJ |
| description | We derive analytical formulas for European call and put options on underlying assets that are exposed to double defaults risks which include exogenous counterparty default risk and endogenous default risk. The endogenous default risk leads the asset price to drop to zero and the exogenous counterparty default risk induces a drop in the asset price, but the asset can still be traded after this default time. A novel technique is developed to evaluate the European call and put options by first conditioning on the predefault and the postdefault time and then obtaining the unconditional analytic formulas for their price. We also compare the pricing results of our model with default-free option model and counterparty default risk option model. |
| format | Article |
| id | doaj-art-9b68b2f443984337a2eda20f51f23b92 |
| institution | OA Journals |
| issn | 1026-0226 1607-887X |
| language | English |
| publishDate | 2018-01-01 |
| publisher | Wiley |
| record_format | Article |
| series | Discrete Dynamics in Nature and Society |
| spelling | doaj-art-9b68b2f443984337a2eda20f51f23b922025-08-20T02:20:26ZengWileyDiscrete Dynamics in Nature and Society1026-02261607-887X2018-01-01201810.1155/2018/83629128362912Explicit Pricing Formulas for European Option with Asset Exposed to Double Defaults RiskTaoshun He0School of Economic Mathematics, Southwestern University of Finance and Economics, Wenjiang, Chengdu 611130, ChinaWe derive analytical formulas for European call and put options on underlying assets that are exposed to double defaults risks which include exogenous counterparty default risk and endogenous default risk. The endogenous default risk leads the asset price to drop to zero and the exogenous counterparty default risk induces a drop in the asset price, but the asset can still be traded after this default time. A novel technique is developed to evaluate the European call and put options by first conditioning on the predefault and the postdefault time and then obtaining the unconditional analytic formulas for their price. We also compare the pricing results of our model with default-free option model and counterparty default risk option model.http://dx.doi.org/10.1155/2018/8362912 |
| spellingShingle | Taoshun He Explicit Pricing Formulas for European Option with Asset Exposed to Double Defaults Risk Discrete Dynamics in Nature and Society |
| title | Explicit Pricing Formulas for European Option with Asset Exposed to Double Defaults Risk |
| title_full | Explicit Pricing Formulas for European Option with Asset Exposed to Double Defaults Risk |
| title_fullStr | Explicit Pricing Formulas for European Option with Asset Exposed to Double Defaults Risk |
| title_full_unstemmed | Explicit Pricing Formulas for European Option with Asset Exposed to Double Defaults Risk |
| title_short | Explicit Pricing Formulas for European Option with Asset Exposed to Double Defaults Risk |
| title_sort | explicit pricing formulas for european option with asset exposed to double defaults risk |
| url | http://dx.doi.org/10.1155/2018/8362912 |
| work_keys_str_mv | AT taoshunhe explicitpricingformulasforeuropeanoptionwithassetexposedtodoubledefaultsrisk |