Pricing options with credit risk in a reduced form model

2016

In this paper, we combine the reduced-form model with the structural model to discuss the European vulnerable option pricing. We define that the default occurs when the default process jumps or the corporate goes bankrupt. Assuming that the underlying asset follows the jump-diffusion process and the default follows the Vasicek model, we can have the expression of European vulnerable option. Then we use the measure transformation and martingale method to derive the explicit solution of it.

Section: Instructionmentioning

confidence: 99%

The European Vulnerable Option Pricing with Jumps Based on a Mixed Model

2016

“…In contrast, the reduced form model which considers that the default is controlled by an exogenous intensity process is more flexible and tractable in the real market. Since the pioneering work by Jarrow and Turnbull [17], more advanced settings and methods have been proposed on the reduced form model, such as Jarrow and Yu [18], Su and Wang [19], Liang et al [20], and Wang et al [21].…”

Section: Introductionmentioning

confidence: 99%

Pricing Warrant Bonds with Credit Risk under a Jump Diffusion Process

2018

Self Cite

This article investigates the pricing of the warrant bonds with default risk under a jump diffusion process. We assume that the stock price follows a jump diffusion model while the interest rate and the default intensity have the feature of mean reversion. By the risk neutral pricing theorem, we obtain an explicit pricing formula of the warrant bond. Furthermore, numerical analysis is provided to illustrate the sensitivities of the proposed pricing model.

“…Huang et al [9] obtained the explicit expression for the European option price under the assuming of fractional Black-Scholes market. Su and Wang [10] and Li and Ma [11] derived the closed form formula for the price of the vulnerable European option by the method of changing measures.…”

Section: Introductionmentioning

confidence: 99%

The Pricing of Vulnerable Options in a Fractional Brownian Motion Environment

Zhou

Yang

2015

Under the assumption of the stock price, interest rate, and default intensity obeying the stochastic differential equation driven by fractional Brownian motion, the jump-diffusion model is established for the financial market in fractional Brownian motion setting. With the changes of measures, the traditional pricing method is simplified and the general pricing formula is obtained for the European vulnerable option with stochastic interest rate. At the same time, the explicit expression for it comes into being.