A closed-form approximation for valuing European basket warrants under credit risk and interest rate risk

Abstract

Over the past few years, many financial institutions have actively traded basket warrants in the over-the-counter market. Prior research has proposed an approach to valuing single-stock options subject to credit. However, this approach cannot be applied directly to the case of basket warrants. Using the martingale method, we propose a closed-form approximation for valuing European basket warrants using a continuous-time model, with credit risk and interest rate risk considered simultaneously. Finally, several numerical examples are utilized to demonstrate the characteristics of basket warrants under credit risk.

Efficient estimation of lower and upper bounds for pricing higher-dimensional American arithmetic average options by approximating their payoff functions

“…In particular, high-dimensional American options would be valuable research topics. For example, Shiu, Chou, & Sheu (2013) document that basket warrants, essentially basket options with multiple underlying assets become more popular over the past decade. 2 In this paper, we focus on pricing American arithmetic average options.…”

Credit Risk Contagion Based on Asymmetric Information Association

“…The contagion of credit risk will increase the complexity of credit risk in the capital market and reduce the transparency of credit risk in the capital market. At present, the introduction and rapid development of CRT (credit risk transfer) market make credit risk management more difficult, and the credit risk contagion is more extensive [1][2][3][4]. Therefore, the study of the contagion law of credit risk in the financial market has attracted much attention of researchers.…”

Probability for transition of business cycle and pricing of options with correlated credit risk

“…In the recent study, Shiu. et al [13] proposed a closed-form approximation for valuing European basket warrants with credit risk. However, none of the studies consider options with credit risk under the varying market environment.…”